The Registry October 2009 Issue

THE

Registry

®

october 2009

BAY AREA real estate JOURNAL

Commercial Market Update

RREEF on the Shoals pg. 10 Not Bankable pg. 14 The Page Mill Grind pg. 20 Less Grand Plan pg. 22 By the Numbers: Tracking Shadows pg. 36

Building an Emerald City: We Feel Green pg. 26 Making a New Mint pg. 28 Saint Sighting in San Carlos pg. 12

Final Offer with BCCI’s Bill Groth pg. 40

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Contents

8 News Desk

26 Green

october 2009

summary of recent planning events A from select cities, news about the

industry and people on the move

10 Commercial Market Report

an Francisco Real Estate Fund S Manager To Face Tough Crowd

12 Hot Lot | Peninsula

Saints Alive!

14 Feature Package: Commercial Market Update

• Commercial Real Estate Roundtable

• Fee Abatement to Stimulate Development

• ‘Radical Gentrification’ in East Palo Alto

• The Coming Storm

• Testing the Limits

24 Employment

Power to the People

• Green, as in Money • Freshly Minted

30 Redevelopment

Piering into the Future

32 Rob’s REality

Where’s the Uptick?

33 REal People:

Events Around Town

34 Calendar of Events 36 By the Numbers

Shadowy Figures

38 Commercial Lease Report 39 Commercial Sales Report

c o v er a n d t h i s page P HO T Os B Y

40 Final Offer | Bill Groth

C h a d Z i emendorf

Re-Building

Contributors Steve Atkinson Fee Abatement to Stimulate Development, pg. 19

Steve Atkinson specializes in land use and development law, including the California Environmental Quality Act and local, state and federal development entitlements. His primary focus is San Francisco. He has successfully represented developers of residential, office, hotel and retail projects. Major accomplishments include Myers Development’s 101 Second Street, The Pacific Center renovation, The Infinity and Crescent Height’s 10th and Market project. His practice includes advising San Francisco clients on affordable housing requirements, historic preservation and transferable development rights. Earlier in his career, he was an attorney for seven years with the Environmental Protection Agency in Washington, D.C., specializing in toxic substances, hazardous substances remediation and waste incineration. He helped to develop the EPA’s new chemical review project under the Toxic Substances Control Act and the EPA’s Superfund program.

Charles Edwin Chase, AIA Piering Into the Future, pg. 32

Charles Edwin Chase, AIA, is an architect with more than 30 years’ experience in architecture and historic preservation. He currently is director of planning for Architectural Resources Group Inc., in San Francisco.

Prior to joining ARG, he was executive director for San Francisco Architectural Heritage for nine years. Chase served on the Port of San Francisco’s Central Waterfront Advisory Committee for eight years and was an advisor to the port on the nomination of three miles of historic waterfront resources to the National Register of Historic Places in 2006. He currently serves on the Executive Board of the California Preservation Foundation, the AIA California Council and is president of San Francisco’s Historic Preservation Commission. He holds master’s and bachelor’s degrees from the University of Florida.

Rob La Eace Where’s the Uptick?, pg. 32

Responding to emergencies as a firefighter in a variety of uncertain situations and diverse neighborhoods taught Rob La Eace a lot about how people should be treated, not only during a crisis, but also in everyday problems.

Today, these same skills are an asset to those who work with this San Francisco native in his career as a broker associate with McGuire Real Estate. The tools he puts to work as a firefighter are what makes the difference to the clients Rob works with as an agent. While it may help that Rob is the type of guy with a warm smile and a friendly attitude, his professionalism, organization and drive to succeed are what make him stand out in his career. Working in his fifth year in the industry, Rob is in touch with his clients’ needs and with the city–putting a local’s perspective to work.

Joe Lewis The Coming Storm, pg. 21

Joe Lewis entered the commercial real estate business in 1980 as a broker with Cornish & Carey Commercial in Palo Alto following service as a U.S. Navy pilot. He was voted Silicon Valley investment broker of the year in 1988 and named president of Orchard Properties in 1996. He founded Orchard Commercial in 2000 and is responsible for all operations including property management, construction, leasing and maintenance. The company has 45 team members and services a commercial portfolio measuring eight million square feet with 500 tenants.

Matt Slepin Power to the People, pg. 24

Matt Slepin is managing partner of Terra Search Partners, a San Francisco executive search and human capital consultancy focused on the real estate industry. Slepin has over 20 years experience in leadership, management and functional roles within real estate. His extensive career in executive search has given Slepin a unique and rich perspective on the ever-changing landscape of commercial real estate. n

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Gateway to thE FUtUrE

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taILor yoUr ExpErIEnCE to MEEt yoUr bUSInESS nEEdS and bUdgEt l Choose a one-day ticket or attend the full meeting. Select tracks, interactive sessions on a wide variety of topics, workshops, tours, and networking events that will give you the most value.

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www.uli.org/Fall2009 Interested in sponsorship, exhibiting, or advertising?

Contact JB Rauch, VP for Development, at jb.rauch@uli.org or call 202.624.7135.

TM

THE

Registry

TM

P.O. Box 1184 San Mateo, CA 94403 415.738.6434

Letter from the Publisher

Publisher Vladimir Bosanac vb@theregistrysf.com President Heather Bosanac 415.738.6434 heather@theregistrysf.com Editor-in-Chief Sharon Simonson 408.334.2512 ssimonson@theregistrysf.com Creative Director Karyn Charm Advertising 415.738.6434 Photographer Chad Ziemendorf Writers Alfred J. Bru, Michael Fitzhugh, Heather Fox, Robert Mullins, Sharon Simonson, Aimee Lewis Strain, Sasha Vasilyuk Contributors Steve Atkinson, Charles Edwin Chase, Rob La Eace, Joe Lewis, Matt Slepin Send Us Your News news@theregistrysf.com Feedback letters@theregistrysf.com Subscriptions subscriptions@theregistrysf.com Printer Bay Area Graphics www.bayareagraphics.com Mission Statement The Registry is a real estate journal that aspires to fulfill the need of Bay Area professionals for accurate, unbiased and timely news, analysis and information.

Ethics Policy The Registry embraces a strict ethics policy for its staff and contributing writers, including columnists and freelance reporters. No person employed by or affiliated with The Registry has accepted or will accept any compensation, monetary or otherwise, in exchange for editorial content. All information that appears in the magazine is selected solely for its informational value to readers.

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Dear Reader, Almost a year to the day since we were all informed that our financial system was three days from an ultimate demise, Fed Chairman Ben Bernanke proclaimed that the Great Recession is “very likely over.” That’s the good news, and we knew it would come eventually. What it means for the hordes of unemployed Americans is an entirely different story; recovery will be long and tough for them because job creation is a long and hard process. More importantly, however, recession’s end does not necessarily mean recovery is nigh, especially in the real estate market, both residential and commercial. High unemployment is one obvious reason; another is the financial system.

Banks remain tepid on residential lending, and on the commercial side, conditions are even worse.

Given our current dire straits, it is perhaps most important today that we employ a fresh set of eyes and perspectives in our industry. Without creative thinking and entrepreneurship, little will change.

I was reminded of this when I recently attended an event in Walnut Creek hosted jointly by Colliers International and Wendel, Rosen, Black & Dean, an Oakland law firm with a substantial real estate practice (Full disclosure: Wendel Rosen advertises with The Registry). It was a very interesting evening session that included an impressive group of panelists (more on the event can be found on this Web site: www.wendel. com/tsunami). The message that resonated with me most was that the commercial mortgagebacked securities market (or some other financial vehicle that may replace it) remains a lynchpin for commercial real estate recovery. We all know that in real estate employment means everything, but without funding, job-growth alone cannot capture the opportunity it presents. Banks and other financial institutions are unlikely candidates to fill the enormous void left by the absent CMBS market. Many already have too much exposure to commercial real estate or simply cannot afford to bear the risk. The dollars involved are also far too big. But until the finance side is sorted out, we can remain assured that little progress will be made.

Yet, creativity and a fresh lens on the world may be the panacea that helps save the day. Dennis Williams, senior vice president and managing director of Northmarq Capital, presented at this event, and he spoke about one example of creativity that offered a glimmer of hope. Williams met not long ago with a Canadian pension fund that is interested in getting into the lending game in the United States. Unencumbered by legacy issues, the fund is in some ways an ideal example of an institutional investor to help things get

moving. It is a natural one, too because of Canada’s geographic and cultural proximity. Additionally, as Asia leads the world to recovery, it too could play a significant role in helping its traditional Pacific Rim partners in California jumpstart a rally. The Wall Street Journal reported recently that China’s $300 billion sovereign wealth fund was planning to do just that. Affordability may not compel American businesses or individuals to act today, given the current economic standstill and lingering fear about the future, but everyone loves a bargain, and we have more than our fair share at the moment.

Those hopeful signs aside, it’s evident we are still poised for more sour notes. One unfortunate maker of bad news lately is RREEF Funds LLC. The Deutsche Bank-owned real estate investor and money manager is a big Bay Area landlord. On page 10 of this month’s issue, The Registry offers an overview of the enormous pickle in which RREEF America REIT III finds itself. We urge readers who are interested in RREEF’s fortunes to stay tuned to our Web site, TheRegistrySF.com, because this fastmoving story seems to produce new information by the day. An Oct. 1 investor meeting in Chicago promises more revelations about how managers intend to salvage the fund through recapitalization, debt relief or possibly even bankruptcy.

Another Bay Area real estate investor, Page Mill Properties, also is adjusting to the circumstance of the economic meltdown. On page 20 we review how developer David Taran is having a difficult time holding on to over 100 properties that his company acquired in East Palo Alto during the peak of the real estate boom. Whatever the conventional wisdom on Taran and his tactics may be, there is no arguing with the property’s value in the long term and the enormous redevelopment opportunity it embodies. Both examples are strong indicators that we still have a way to go before circumstances settle in the commercial market and we all start up the long path to recovery. On a more promising note, they both also illustrate extremely well that there is an opportunity to make things much better, and these two companies are certainly the ones prepared to do that.

Chairman Bernanke’s observations offered a much needed sign of relief. What recovery will look like and how exactly it will come remain anyone’s guess. We at The Registry stand ready to keep the industry informed with the vital information it needs to make the best decisions in a difficult world We welcome feedback and hope to hear from you.

Vladimir Bosanac

RMKB attorneys handle your nightmares so you can sleep at night.

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Editorial Boards Board members of The Registry serve without expectation of recompense or reward. They advise the magazine’s executive team on matters of relevance to the region’s commercial and residential real estate community. The board’s make up reflects the wide readership of the magazine including attorneys, architects, interior designers, residential and commercial real estate brokers, investors, lenders, general contractors and subcontractors, engineers and other professionals.

NORTH

Stephen Austin, Bruce Dorfman RPA Principal

Daniel Huntsman, LEED AP

Jesshill E. Love III

Phil Williams, P.E., LEED AP

Paul Zeger

Regional Property Thompson | Dorfman Manager Partners, LLC President and Boston Properties Founding Principal Huntsman Architectural Group

Photos by Chad Ziemendorf

Jeanne Myerson

Anton Qiu

President and Chief Executive Officer The Swig Company

Senior Vice President TRI Commercial

Vice President Webcor Builders

Partner Ropers, Majeski, Kohn & Bentley

Principal, President & CEO Pacific Marketing Associates

Daniel Myers Partner, Real Estate Practice Group Leader Wendel, Rosen, Black & Dean LLP

Marc Cunningham President All West Environmental, Inc.

SOUTH

the districts Success Begins With a Focus The Downtown Oakland &

Jennifer Dizon, CPA Audit and Advisory Partner Hood & Strong, LLP

Terry de la Cuesta, IIDA, LEED AP Associate RMW Architecture & Interiors

Erik W. Doyle President Cornish & Carey Commercial

Geoffrey C. Etnire Co-Chair, Real Estate Group Hoge, Fenton, Jones & Appel, Inc.

Michael W. Field Director, Commercial Real Estate The Sobrato Organization

Lake Merritt/Uptown District associations

began 2009 with a single goal—take matters into

their own hands to revitalize the city in the heart of the Bay Area. Because of their work, Oakland is becoming a great place to live, work and play.

sPeciAL oAkLAnd sUPPLeMent coming in the next issue of The Registry

Norman C. Hulberg, MAI

Robert Kraiss, CFM

President Hulberg & Associates, Inc.

Director of Corporate Facilities and Real Estate Adaptec, Inc.

Jody Quinton Regional Manager DPR Construction, Inc.

Patricia Sausedo

Jeffrey A. Weidell

Executive Vice President of Vice President Public Policy NorthMarq Capital and Communications San Jose Silicon Valley Chamber of Commerce

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News

Desk

M on t hl y S u mm a r y

By Heather Fox

Planning News from around the Bay San Francisco

San Jose

49 Fell Street

Northeast corner of Holger Way and North First Street

The San Francisco Planning Commission has approved the demolition of a one-story concrete and wood-frame commercial building to allow construction of a five-story mixed-use building with ground floor retail, three floors of offices with 9,900 square feet, and three residential units on the fifth floor. This project revises a project previously approved for this property in December 2005. The developer will pay into a fund to meet its public open-space requirement.

The San Jose Planning Commission has given a conditional-use permit to build approximately 148,000 square feet in three buildings to accommodate a large-format commercial establishment and associated commercial uses on a 14.1-acre site in the Industrial Park zoning district.

Palo Alto

2655 Bush Street

200 San Antonio Road

The San Francisco Planning Commission has approved a conditional-use permit to allow a planned unit development for the construction of a four-to-six story building that contains 81 residential units, 99 parking spaces and approximately 4,180 square feet of commercial space in a medium-scale neighborhood commercial district. The project also includes demolition of a vacant two-story convalescent facility that currently occupies the site.

The City of Palo Alto has extended a development agreement for an approved 45-unit townhome development on land owned by the Hewlett-Packard Co. at San Antonio Road and Central Expressway. Known as the Toll Brothers project, 45 housing units would be constructed on approximately 4.9 acres in Palo Alto, and 450 housing units would be constructed on approximately 20 acres in Mountain View. n

Sent to us Blach Construction Completes Kaiser Renovation In San Jose Santa Clara-based Blach Construction Co. has completed interior renovation and expansion of the Kaiser Permanente Child and Adolescent Psychiatry & Autism Spectrum Disorder Center in San Jose. The center will serve as one of three regional treatment facilities in Northern California.

The scope of work included extensive conversion of existing space and an expansion to 26,000 square feet.

Led by Blach project manager Bassel Anber, the Blach team included Senior Project Engineer Paul Ford, Superintendent Casey Samis and project coordinator Tamera Johnson.

350,000 square-foot Beaux Arts-style building. The project will be completed in phases, starting with this design contract. The HKS/ARG team includes 18 additional local consulting engineers and building specialists. Design work is expected to be completed by September 2010.

GSA was appropriated $5.5 billion under the Recovery Act to convert federal buildings into high-performance green buildings and build new energy-efficient federal buildings, courthouses and land ports of entry.

Colliers Represents Sale of 400 Longfellow Court in Livermore Gould Livermore LLC has sold a former Circuit City distribution center at 400 Longfellow Court in Livermore for $21 million, or about $35 a square foot.

The 610,000 square-foot building was constructed in 1998, is situated on 34.43 acres and was purchased by Edmund Jin of E & E Co. E & E is a manufacturer and distributor of home goods. It will occupy 310,000 square feet of the building and lease the remaining square footage.

Early San Francisco Skyscraper Earns LEED Silver

John Steinbuch and Michael Lloyd, senior vice presidents with Colliers International Pleasanton, and Greig Lagomarsino, senior vice president with Colliers International Oakland, represented the seller.

Ellis Partners has earned LEED Silver certification for its historic San Francisco building, 111 Sutter Street.

The property is one of the largest industrial buildings sold in the Bay Area in the last few years and was on the market for four months prior to its sale.

Built in 1927 as one of the city’s first skyscrapers, 111 Sutter has been extensively renovated with new plumbing and electrical distribution systems on all 22 floors. The company earned the Silver certification primarily by monitoring and managing waste handling practices at the building and by auditing other building systems.

San Francisco Residential Brokers Combine Forces San Francisco’s Hill & Co. Real Estate has acquired Peletz & Co. Real Estate, a rival residential and commercial brokerage established in 1995.

Peletz specializes in water-front properties including South Beach, the North Waterfront, North Beach, the Marina, Pacific Heights and Sea Cliff. The acquisition includes the Peletz office at Sansome and Lombard streets. Owner Steve Peletz and his company’s agents are expected to join Hill.

Hill & Co. brings a 50-year history, three offices and nearly 100 full-time agents to the union.

Swinerton Builders and NASA have begun construction on the $20-million, 50,000-square-foot Sustainability Base building at the Ames Research Center at Moffett Field in Mountain View.

Sustainability Base will be a research facility for studying sustainability on Earth and is designed to achieve LEED Platinum certification for new construction.

Green features of Sustainability Base will include heating, ventilating and air conditioning systems that use ground-source heat pumps; solar hot-water systems; and an advanced lighting system. In addition to the structure, the project includes site preparation, utilities, installation of 72 geothermal wells, parking, California native landscaping and the development of a storm-water management system.

The building will have zero net energy consumption and use 90 percent less potable water than conventionally built buildings. Once complete, Sustainability Base is expected to be the greenest and highest-performing building in the federal government’s portfolio.

GSA Selects Architects to Renovate United Nations Plaza Building

San Francisco Developer Appointed Receiver for Watergate Office Complex

The U.S. General Services Administration has awarded a $7.9 million design contract to convert San Francisco’s 50 United Nations Plaza Federal Building into modern, energy-efficient offices.

San Francisco’s TMG Partners has been named by a state superior court judge to act as the receiver for NOP Watergate LLC. NOP Watergate, a Hines property, owns three buildings subject to a defaulted $152 million mortgage. The buildings total more than 814,000 square feet and are located at 1900, 2000 and 2200 Powell Street directly adjacent to Interstate 80.

The contract, funded by the American Recovery and Reinvestment Act, was awarded to San Francisco architectural firm HKS Inc. in partnership with Architectural Resources Group, also of San Francisco GSA has allocated $121 million for design, renovation and seismic upgrades to the

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Building to House Sustainable-Living Research Starts at NASA

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The entire 1.2 million square-foot Watergate office complex includes a fourth building, which remains owned by Hines and is 100 percent leased to Oracle and Novartis.

TMG was recommended by Pacific National Bank, the mortgage holder. n

PEOPLE on the move

hot lot

CB Richard Ellis Welcomes Andrew Behrens as Executive Vice President Andrew Behrens has joined commercial brokerage CB Richard Ellis as an executive vice president in the Capital Markets division. Behrens brings 22 years of real estate experience, all of it in multifamily, including nine years in property sales and the past 13 years as a mortgage banker. Most recently, he was a principal with Prudential Mortgage Capital Co. in its San Francisco office and the top revenue generator for the firm nationally. Behrens speaks frequently on issues surrounding Fannie Mae, Freddie Mac and the Federal Housing Administration.

Rich Martini Joins Colliers International Walnut Creek Office Colliers International has tapped Rich Martini to help grow its Greater East Bay multifamily business. As a vice president, Martini will be responsible for working with private client investors to achieve asset acquisition and disposition objectives. He has more than 25 years of commercial real estate and business leadership experience, including asset acquisition, disposition and property exchange strategies.

Martini comes to Colliers from Kilpatrick & Co., where he served as an investment sales associate working with multifamily investors throughout the Bay Area. Before embarking on a business career, Martini played five years in the National Football League as a wide receiver with the Oakland Raiders and New Orleans Saints, and he was a member of the Oakland Raiders Super Bowl XV winning team.

A leader. An educator. A craftsman.

With more than 20 years under his belt, Gregg knows real estate inside and out. Having handled hundreds of transactions, including commercial leases, purchases and sales, loans and work outs, Gregg has drafted just about every clause one could imagine. He's an author for California Continuing Education of the Bar books on real estate financing, sales transactions, retail leasing and office leasing. He also writes and speaks on green leasing issues. In 2005, the National Retail Tenants Association

Two McDonough Holland & Allen PC Attorneys Earn LEED Professional Accreditations

(NRTA), for which he serves as General Counsel, awarded him the

McDonough Holland & Allen PC attorneys Susanne Meyer Brown and Matthew Visick earned the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) Accredited Professional (AP) status.

groups, such as ICSC and BOMA. No matter what your real estate

Founder’s Service Award. He is a frequent presenter for NRTA and other

Brown, who practices in McDonough’s Oakland office, concentrates on public and municipal law, advising on transactional matters in real estate, redevelopment, land use and public contracting for public agencies and private entities. She also has experience in all phases of civil litigation focusing on commercial real estate matters.

Also working from the firm’s Oakland office, Visick is a member of the Public Law Practice Group, where he provides advisory, transactional and litigation services related to general municipal issues for cities, counties and other public agencies in the Bay Area.

Brokers Join GVA Kidder Mathews in Redwood Shores, San Francisco Fabrizio Paolozzi (left, top), Bryan Pennington (left, bottom) and Brad Scott, specialists in industrial sales and leasing, have joined the Redwood Shores office of commercial brokerage GVA Kidder Mathews.

Paolozzi moves from Coldwell Banker Commercial’s Burlingame office where he leased and sold more than 370,000 square feet of commercial property with a transaction volume of $36 million in the last three years. He will be a vice president with GVA Kidder Mathews and will continue to specialize in industrial properties.

Pennington, who is also from Coldwell Banker Commercial, has leased and sold more than 400,000 square feet of commercial real estate with a total transaction volume of $40 million in the last two years. Pennington will be a vice president with GVA Kidder Mathews and will continue to specialize in industrial properties.

Scott will also specialize in the sale and leasing of industrial properties.

Meanwhile, two clean/green-tech office specialists, Bart Damner (right, top) and Lent Howard (right, bottom), both from Colliers International’s San Francisco office, have joined GVA, also in San Francisco. Both have been in commercial real estate for 10 years and will be vice presidents. They will continue to specialize in office properties and tenant representation with a focus on clean-technology and green-technology companies.

Damner has leased more than 450,000 square feet of commercial space and completed more than 100 transactions.

Howard is a LEED Accredited Professional who began his career in real estate lending and transitioned to commercial real estate a decade ago.

GVA Kidder Mathews’ adds Multi-Family Investments to its San Francisco Office Morgan Thomas, an apartment investment property specialist has joined GVA Kidder Mathews to further expand the firm’s Bay Area service lines. Thomas is the first apartment specialist to join the San Francisco group, although the firm has a well established apartment group in the Pacific Northwest. Thomas has been in the industry for nine years. He will be an associate vice president with GVA Kidder Mathews’ downtown San Francisco office. continued on page 35

transaction, Gregg is the skilled craftsman on whom you can rely.

commercial market report

San Francisco Real Estate Fund Manager To Face Tough Crowd Investors meet with RREEF Funds LLC to hash out future of a faltering investment fund.

S

Above: RREEF owns Market Center on Market Street in San Francisco The stalled Sunnyvale Town Center

10 theregistrysf.com

tockholders in a real estate investment fund with extensive Bay Area holdings will learn at an early October meeting in Chicago how San Francisco money managers RREEF Funds LLC intend to address millions of dollars in looming debt maturities that threaten to propel the fund into bankruptcy.

DeWitt Bowman, lead independent director for RREEF America REIT III, said federal court protection is one tactic that fund managers are exploring as they rush to save equity in a market where commercial values are plunging and refinancing debt is difficult at best.

The fund’s board has hired financial advisor Lazard Ltd. and law firm Morrison & Foerster LLP to represent shareholders, said Bowman, a former investment chief for CalPERS and an investor in the RREEF fund himself. Deutsche Bank AG, which owns RREEF Funds, has hired its own team of financial and legal experts.

The turn of events has tarnished RREEF’s reputation, though how much is not yet clear. The company has been one of the best-known and well-regarded real estate fund managers. Its clients and partners include global heavy hitters such as the California Public Employees’ Retirement System and GE Capital. The precipitous drop in all asset values over the last year will provide cover for professional money managers of every stripe including those in the commercial property industry.

But there are indications that RREEF’s problems are different. A flurry of news reports two years ago documented the departure of at least seven RREEF managing directors.

Managing directors are RREEF’s senior-most executive ranks. Since then, even more managing directors have left,

Chicago-based pension fund investment advisor Ennis Knupp & Associates told client Ventura County Employees’ Retirement Association in December that it was concerned about the executive defections and intended to “monitor RREEF’s organization in the upcoming year.”

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though nailing down an exact count or tracing a common reason is difficult at best. A spokesman for Deutsche Bank declined comment on the question. But the issue is significant enough that Chicago-based pension fund investment advisor Ennis Knupp & Associates told client Ventura County Employees’ Retirement Association in December that it was concerned about the executive defections and intended to “monitor RREEF’s organization in the upcoming year,” according to board minutes.

Whatever happens to its fund and RREEF the company, what is obvious is that the Bay Area will bear witness. RREEF America III owns millions of square feet of property in San Francisco, Silicon Valley and the East Bay and does business with companies throughout the region. How its holdings are managed and sold will affect the region’s communities.

Already, RREEF has stopped work on the $750 million Sunnyvale Town Center redevelopment for lack of money; the project is less than half done. The company also is being sued for nearly $20 million by one of Silicon Valley’s largest general contractors, Milpitas-based Devcon Construction Inc., for alleged failure to pay Devcon and dozens of its subcontractors for millions of dollars of work. RREEF also has defaulted on two loans totaling $130 million backed by two Bay Area properties. The loans are held by two San Francisco-based lenders: Wells Fargo & Co. and United Commercial Bank.

The spokesman for Deutsche Bank said RREEF does not comment on the performance of its proprietary funds.

For Tim Thonis, administrator of the Ventura County Employees’ Retirement Association, one fact about RREEF’s reputation is evident: The RREEF America REIT III fund has been his worst performer. The association invested $25 million, or about 1 percent of total assets, in the fund in 2007.

Its investment is now worth $7 million, Thonis said. He also cannot get out. The fund’s debt problems and the moribund commercial property sales market have so reduced liquidity that RREEF is using every dime it gets to keep the fund alive and cannot meet distribution requests.

“Hindsight is a wonderful thing, and I don’t want to sound like I am throwing anyone under a bus,” Thonis said, “but having all of these financing maturities in a relatively short period [throughout 2009] has turned out to be a lessthan-sound decision in this market.”

Yet, Thonis says, he has not given up all hope for RREEF. Asked if he would ever invest with RREEF again, Thonis paused and said, “I think it is unfair sometimes to judge anyone without going through a full [business] cycle where an asset class is both in and out of favor.”

Launched in 2003, RREEF America III was organized as an open-ended, private investment vehicle that would buy

p h o t o s by C h a d Z i emendorf

By Sharon Simonson

and hold interests in multi-family, industrial, retail and office properties located in metropolitan American markets. The fund raised $2 billion in equity and has somewhere in the neighborhood of $2 billion in debt, about half of which was scheduled to mature this year and next.

Independent directors of the fund, all of whom are also investors, include several Bay Area real estate luminaries.

Besides Bowman they are Duncan L. Matteson, chairman of The Matteson Cos., a Redwood City-based commercial property owner with holdings across the Bay Area in multiple property types; Claude Gruen, principal economist with Gruen Gruen + Associates, which specializes in the economics of land use and has offices in San Francisco and Deerfield, Ill., a Chicago suburb; and Willis K. Polite, a principal and co-founder of Seagate Properties Inc., a San Rafael-based commercial property owner with holdings throughout the Bay Area.

Asked how he felt about the fall in his investment’s value, Bowman declined comment. He was not critical of RREEF management, citing market conditions as the main culprit.

In total, the fund has more than 270 investors. In California alone, employee retirement associations for Ventura, San Joaquin, Marin, Sonoma and San Bernardino counties all have millions of dollars invested. At one point investor demand was so strong to get into the fund that managers had a queue of investors waiting in line to turn over their money, a knowledgeable source said.

The fund also owns hundreds of Bay Area properties, including San Francisco’s 770,000 square-foot Market Center and the 350,000 square-foot office complex One Concord Center in Concord. It also owns more than 100 Silicon Valley office and research and development buildings that it bought in a single, landmark deal from the Peery-Arrillaga company, a valley stalwart, for more than $1 billion in 2006.

According to RealPoint LLC of Horsham, Penn., which tracks the performance of commercial mortgage-backed securities, the Peery-Arrillaga portfolio secures $700 million in outstanding CMBS debt. RealPoint has expressed worry about the debt’s performance, though RealPoint Managing Director Frank Innaurato said none of the debt has been reported to a special servicer due to borrower troubles. The debt matures in November with two, one-year extension options available.

“Lease rollover is a considerable concern for this portfolio,” RealPoint said in a report. “… [L]eases for 53 percent of the [gross leasable area] roll prior to maturity. In addition, the average in-place rents are above market averages.”

“Our concern with this loan is primarily due to the concentration of the collateral properties in California, a state that is being impacted more so than most by the current difficult economic conditions,” the RealPoint report continued.

GE Capital is a 49 percent equity partner with the RREEF fund in the Peery-Arrillaga holdings. At GE’s urging, RREEF sought several years ago to sell a portion of the Peery Arrillaga portfolio but never did. n

At BCCI, we’re known to be a tad meticulous at times. So if you find us to be exceptionally detailoriented and refreshingly forthright, particularly in the early phases of a project, it’s only because we see one of our most valuable roles as

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hot lot | san carlos

Saints Alive!

Peninsula’s San Carlos is beating the economic riptide.

Sheryl Pomerenk, chief executive of the San Carlos Chamber of Commerce

12 theregistrysf.com

I

magine a crystal ball that could forecast the twists and turns of the real estate market.

John Baer, senior vice president of development for San Carlos-based Matteson Development Partners, wishes he had one about 20 months ago. If he had foreseen just how much the housing market would soften, appearances might be quite different at 1001 Laurel St. in his company’s hometown.

Instead of the stylish, four-story, mixed-used condominiums that Matteson recently unveiled on Laurel, there would be an empty lot. “We probably would not have commenced with construction at that time, and we would have put the project on ice for a couple of years,” Baer said.

But crystal balls remain relegated to fairy tales, and Baer forged ahead with construction, all while watching the American economy collapse. Fortunately for Baer, this particular tale may yet have a happy ending. More than 500 people attended his development’s opening weekend on July 18. An interest list is bulging with more than 1,500 names, and of the fifteen buyers that made a $2,500 deposit to reserve a unit, ten have closed; three more are in final contract. One-bedroom condos start at $430,000; three bedrooms go for $780,000.

“I think we’re going to meet the targets we’ve agreed to with the lenders just fine,” Baer says.

A key source of optimism is the location of the 90-unit complex on the cusp of San Carlos’ downtown. There, almost 40 restaurants, bakeries and

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coffee shops cluster, including two Starbucks, a Clooney’s Tavern and the Refuge Wine Pub, where $13 buys a hefty, hand-carved pastrami sandwich.

Family-owned Bianchini’s Market, with an oldfashioned deli and locally grown fruits and vegetables, opened in April. Even the Caltrain station at San Carlos Avenue and El Camino Real is reachable by foot.

Business indicators attest that San Carlos is holding its own in these dicey times. The city’s 2009 property assessment roll grew 2 percent over last year to $6.7 billion. Remarkable considering that this year the state reported its first decline in taxable property values since it began keeping records in 1933. Citywide sales taxes passed the $7 million mark last fiscal year, an increase of 4.42 percent over the year before.

“The downtown businesses have not been as impacted as other places along the peninsula.

There’s been a drop, absolutely, but it’s not been as heavily felt in San Carlos as it is in other places,” says Sheryl Pomerenk, chief executive of the San Carlos Chamber of Commerce. “There are very few empty buildings and none of our restaurants have gone under. A couple of small businesses have gone under, but I’m not sure if it was due to the economy.”

Kelly-Moore Paints has called San Carlos home since it began operations in 1946. L3 Communications, which serves the aerospace and defense industries, Allied Waste Management and Pacific Gas & Electric Co. have operations there, as does the San Mateo County Transit District, SamTrans.

Not bad for what was a rather sleepy, quaint community of 600 when it incorporated in June 1925. At the time, residents were served by three gas stations, a pharmacy, a repair shop, a bank and a handful of food stores. Today, the city has more than 2,000 businesses, families whose median income is closing in on $140,000 a year and a population approaching 28,000. Sixty percent of San Carlos’ residents are married.

Above: Downtown San Carlos Below: 1001 Laurel condominiums Art Wong and John Baer

p h o t o s by C h a d Z i emendorf

“The downtown businesses have not been as impacted as other places along the peninsula.

There’s been a drop, absolutely, but it’s not been as heavily felt in San Carlos as it is in other places.”

By Alfred J. Bru

The family atmosphere and downtown’s appeal helped persuade 87-year-old Art Wong to buy two units a 1001 Laurel and to leave his Los Altos Hills home of 46 years. “It’s a wonderful little town, with wonderful restaurants, and you see kids running up and down the street,” Wong says.

Not everyone is feeling the love. Electric car maker Tesla Motors Inc. recently announced that it would leave San Carlos for Stanford Research Park in Palo Alto. Vic Balushian, former owner of Vic’s Family Restaurant on San Carlos Avenue for 27 years, is now in his eighth year running his Sign Works business on Industrial Road. He would like the city to do more to drive shoppers through his door.

“My sign business is doing OK, [but] it could be better. My receivables are vacant; my cash flow is poor,” Balushian says.

As a veteran of the San Carlos restaurant scene, he also questions how well the local eateries are faring. “I’d say a handful of them are successful. The upper-end restaurants and newer ones are doing well. But I’m not sure if every one of them is.”

Pomerenk touts several activities that the city undertakes to support business, including its annual Art & Wine Faire in October, which drew 75,000 people last year. Every Thursday evening from May to mid-September, the city re-routes road traffic so locals and visitors can safely stroll the Hot Harvest Nights Farmers’ Market. The city also launched a “Shop San Carlos” marketing campaign in 2008, complete with banners, brochures and a mailer.

“You have to monitor your downtown; it’s like a living organism. You just can’t let it go, you have to watch it and help it,” says Al Savay, community development director for the city.

San Carlos also is on the verge of approving a new 20-year General Plan. Because there is not much land available, part of the plan calls for increased development of mixed-use, medium-density housing. “The next growth area will be in and around the downtown, around Laurel Street, the El Camino Real corridor and around City Hall,” Savay says.

Several developments are in the talking, planning or design phase but not proceeding until financiers feel good enough about the economy.

When that time comes, San Carlos hopes to see ground broken for an 8.7-acre transit village near the train station on El Camino. Proposed by Legacy Partners Residential on land owned by SamTrans, the village would encompass 280 apartments, 14,000 square feet of retail, 16,000 square feet of offices, a station entrance and a transit center for

shuttles, taxis and buses.

The city also wants 1.5 acres that it owns southwest of San Carlos Avenue and Laurel Street turned into Wheeler Plaza, a mixed-use development that Pomerenk says would add to downtown’s vitality. In February, San Carlos assigned Silverstone Communities to evaluate the site and come up with a plan.

On an 18-acre site at 301 Industrial Road just north of Holly Street, the city still hopes that Sutter Health will follow through on plans to build a Palo Alto Medical Foundation San Carlos Center. The 97bed hospital was expected to have 120 primary and specialty physicians on staff but is on hold due to a freeze on virtually all capital spending within Sutter.

In the meantime, the city is pleased with the success of San Carlos Marketplace, which opened in November 2007 at Industrial Boulevard and Howard Avenue. Tenants include Best Buy, T.J. Maxx, Bassett Furniture, Pet Smart and a few other home goods and dining establishments.

“San Carlos Marketplace has been a big success and something we’d like to repeat,” says Mark Sawicki, economic development and housing manager for the city. He now dreams of a landmark hotel going up near Holly Street and Industrial Road.

Given the economy in general and the straits of the hospitality industry in particular, he realizes it is a dream likely to be delayed, at least for a time.

But hope does spring eternal. “In three to five years, we can see trying to put something there, a high-quality hotel with surrounding offices, retail and restaurants,” Sawicki says. n Above: Bianchini’s Market Hot Harvest Nights Farmers’ Market The Cask Wine Bar Left: San Carlos Marketplace

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theregistrysf.com 13

Commercial Market Update Genesis SIMONSON: A lot has been written about how lenders and commer-

cial and residential real estate borrowers find themselves where they are today. I wondered if you all saw things in your own business lives that perhaps only in retrospect you realized were significant and indicative of what was coming.

HUNTER: One thing we saw was on the commercial real estate side is

you could see some of the loan terms get easier for the borrower. You would see deals where a borrower could get a 90 percent loan-to-value on a strip center and interest-only [loans] for two, three, four, five years.

Most people believe that those loans have lost almost all their equity and are now completely under water.

SIMONSON: Were those kinds of loans unusual enough for you histori-

cally that you paid attention to them at the time?

HUNTER: Yes. As you watch the swing between what the loan-to-value

is, what kind of rents are being projected and the other terms, those are indicators of where the market is.

SHEPARD: In terms of construction, a loan-to-cost was a marker. What

percent of your cost could you finance, and would you use the land at its cost or its appreciated value? It was a gradual shift. The most aggressive I remember was a 90 percent loan-to-cost that we financed on an adaptive reuse of a school up in Petaluma.

UHLER: I would say it was pervasive through every sector and at every

commercial

level of involvement. We had the single-family home market where terms got worse and worse with regard to protection from a credit standpoint.

We all know about that. Wall Street helped it by the lack of oversight on the rating-agency side for [securities] issuances. We saw it on the commercial side in the construction lending where the terms loosened up, with the underwriting in the CMBS market. The rating agencies allowed underwriting that was clearly not sustainable. You had a rating agency taking a CMBS loan where you used to have to be underwritten with in-place, current cash flow with a certain debt-service coverage. They were underwriting at a future cash flow and the rating agencies were still giving that [debt] a AAA or AA rating. It was absurd.

SHEPARD: Interest only still is available now on a low-leverage Fannie

Mae loan.

HAWORTH SHOWROOM 555 Mission Street, Suite 1950, San Francisco

There’s nothing like a market thrashing to drive performers to the top and the weak to the bottom. Ask Gino Blefari, a 25year veteran of the regional housing market. Finance dominates discussion in the commercial real estate industry today.

To better understand where we have been and where we are going, The Registry sat down with four regional experts whose daily jobs are to unravel the financial mistakes of the last several years and to create and structure solutions to lead the industry from the morass. Here is the story they told us.

14 theregistrysf.com

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SHEPARD: If it’s low leverage, I don’t think it’s egregious.

SIMONSON: Mr. Huntley, your firm steps in after the fact, in a sense.

Were there things that occurred that you see now were precursors?

HUNTLEY: As it relates to troubled-debt restructuring, we step in after

the fact, but now we are right in the middle of it. Where we saw the problem was in the troubled-lease restructuring. We work or represent or are retained by private-equity firms, a lot of the largest ones, both on the East and West coasts. And they would make investments in publicly traded retail or restaurant companies, and we would scratch our heads and say, ‘There’s no way this transaction is going to work,’ and then it was just a matter of time before we got retained. And so we’ve been involved in, I’ll call it the more lax lending, but not in the direct real-estate lending capacity, but more as it relates to companies purchasing retail and restaurant concepts on a leveraged basis that made no economic sense.

SIMONSON: Which actually does have real estate repercussions…

HUNTLEY: Yes, but it’s not in the traditional residential and commercial

real estate sense that was just mentioned.

bu i ld i n g p h o t o by C h a d Z i emendorf

round table

SIMONSON: What do you think about that?

SIMONSON: When those deals were being done, what years would that

have been and were you all saying at the time, ‘You know, this is only going to lead to trouble?’

HUNTLEY: It’s been done since private equity got interested in these

kinds of business transactions.

SIMONSON: So there was nothing at the time that made you feel like this was unusual or particularly noteworthy?

HUNTLEY: No. That’s why our firm has been busy for the last 17 years.

[But] there was a lot of loose money, and everything we are going through now is really deleveraging. This stuff isn’t that complicated. The financial institutions need to deleverage. The real estate developers need to deleverage. And the consumer needs to deleverage.

“There was a lot of loose money, and everything we are going through now is really deleveraging. This stuff isn’t that complicated. The financial institutions need to deleverage. The real estate developers need to deleverage. And the consumer needs to deleverage.”

Steve Huntley, partner, Huntley, Mullaney, Spargo & Sullivan

HUNTER: I think one of the funny things is that in the height of the

market many of my borrower clients would swear off conduit (CMBS) financing. ‘These guys are a pain in the neck. They’re inflexible. We have to jump through all their hoops.’ Then they would go out and price it, and the conduit loan would always be a little cheaper, or usually would be. It was a difficult thing to resist.

SIMONSON: Are those same clients coming to you now saying, ‘Oh, I

wish I had never done that?’

HUNTER: Yes.

present

r o u n dtable p h o t o s by s i dne y er t h a l

SIMONSON: What are you doing for them?

HUNTER: This is probably the arena that we are all playing in right now.

You have to look at each person’s situation, and you have to look at it in terms of their entire portfolio. A lot of times borrowers are myopic.

They may have 10 properties with 10 lenders, and one is 50 percent under water. So they go to that bank and say, ‘Bank, you should take a 50 percent haircut.’ But a lot of times the best approach is taking a look at the entire situation, which means dealing with all of the lenders, which is very labor-intensive. In many cases it’s harder to get a single deal in a portfolio restructured because of all the other interests at play.

SIMONSON: I am sure the lender sees other assets and thinks that there

is money to be had somewhere.

UHLER: Absolutely. That is one of the things we’ll ask our clients when

we’re talking about any troubled assets. We’ll say, ‘We can’t make a deal with you until we see your entire world.’

Joan Uhler is a senior vice president for KeyBank in its Asset Recovery Group. She leads a team of 15 professionals in the Western United States who work on the bank’s troubled commercial real estate portfolio. She has more than 20 years experience in real-estate finance including loan originations, debt workouts and managing foreclosures. Cleveland-based KeyCorp. is one of the nation’s largest bank-based financial services companies with assets of approximately $98 billion. KeyCorp. trades on the New York Stock Exchange under the symbol “KEY.” Elizabeth Shepard is president of San Rafael-based Casner Shepard Financial, a commercial mortgage brokerage that specializes in custom financial solutions for nearly all types of commercial property transactions. During the boom, Shepard focused on construction financing for developers throughout the Bay Area; she now has taken on trouble-shooting for banks and others seeking debtrestructuring and property-related advice as well as financial services.

Chris Hunter chairs the real estate practice group with more than 20 attorneys at full-service law firm Morgan Miller Blair in Walnut Creek.

He began his practice in the early 1990s working for law firm Leland Parachini Steinberg Flinn Matzger & Melnick. The firm was general counsel to Sumitomo Bank handling all of the bank’s bad real-estate loans. Hunter’s expertise includes real estate-related debt workouts, foreclosure, bankruptcy, the sale of REO assets and transactional work. At present, he spends most of his time representing lenders, borrowers and opportunistic investors.

Steve Huntley is a partner with financial restructuring firm Huntley, Mullaney, Spargo & Sullivan at its California offices in San Ramon.

The company represents residential and commercial property owners and developers in loan modification, discounted loan payoff and personal-guaranty negotiations and settlements with lenders. Over the last two years, Huntley has negotiated more than $1 billion of loan modification and guaranty settlements with more than 40 financial institutions nationwide. HMS provides lease restructuring and termination services to publicly traded retail and restaurant companies including OfficeMax, Pep Boys, Ruth’s Chris and Sonic Restaurants.

The firm also advises companies seeking to reorganize their operations in Chapter 11. Clients have included Boston Market, Sizzler, Loews Cineplex and Buffets Inc. Huntley is involved in all three business divisions.

Sharon Simonson has been a working journalist for 20 years, the last eight of them covering real estate, both commercial and residential, in the San Francisco Bay Area. She began her career as a daily newspaper reporter in Denton, Texas, covering city hall. After two years, she moved to the newspaper’s business beat and has covered the world of commerce on and off ever since. She moved to the Bay Area in 2000 and began covering real estate shortly thereafter.

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theregistrysf.com 15

Commercial Market Update SIMONSON: And do they comply?

UHLER: If they want to try to make it work.

HUNTLEY: Absolutely. The cards have to be on the table. If we can’t agree on

the facts, you’ll never agree on a solution.

SIMONSON: In conversations that I’ve had recently, people have talked about

the fact that it’s not just having a deficiency on one property that is going to make strong companies fail. It’s going to be having deficiencies on property after property after property involving millions of dollars. That can bring down a pretty big company. Is that the kind of scenario that you foresee?

UHLER: Yes. From a banking perspective our best way to do business is on

a relationship level. And most other banks participating in the commercial real estate markets are the same way. The likelihood is that we don’t have one loan with a sponsor; we have multiple loans with the same sponsor. BofA

“On the commercial side beyond the lack of credit, there’s a deteriorating tenant base. Tenants are demanding rent concessions and not renewing leases. Employment is shrinking, so all of the aspects that provide income are under pressure.”

Chris Hunter, attorney, Morgan, Miller, Blair

[Bank of America] does, and Wells [Fargo] does, too. We all have them. We also may have bought pieces of each other’s loans. So it’s all integrated. There is enough debt out there, and enough deficiencies in the loan market, to bring some very great companies down to the ground.

SHEPARD: Joan, isn’t it true if you syndicated a loan and the FDIC [Federal

Deposit Insurance Corp.] has taken over one of the entities that participated, then that freezes everything for all of you?

work SIMONSON: How does the scope of the commercial real-estate situation

compare to the residential real estate fiasco that we have just experienced, which brought down at least three huge banks?

HUNTER: On the commercial side beyond the lack of credit, there’s a dete-

riorating tenant base. Tenants are demanding rent concessions and not renewing leases. Employment is shrinking, so all of the aspects that provide income are under pressure. The other piece is that you have risk where you have otherwise performing assets, but the loans are maturing, and without the conduit players in the market, it’s like musical chairs where they pulled away three chairs.

SIMONSON: So what does that mean about what you are doing on a

daily basis?

SHEPARD: Praying. We’ve sort of shifted our focus in that we have been con-

tacted by one lender that we worked with in the past and are actually doing a workout for him. We are the boots on the ground. We are taking an incomplete condominium project in Los Banos, the epicenter of destruction. So in my office now is a developer who is a general contractor. We’ve prepared a scope of work, gotten general contractor bids, qualified the bids and negotiated the bids; worked with the assessor’s office to get a payment plan on the taxes; worked with the city to get a deferral on the impact fees. We may get a bond. We are doing sort of a re-use making it into a rental product, and we have hired a property management firm that will be doing the leasing as soon as the construction is finished, and then we’ll be managing the asset. We have arranged the interim financing, which was not easy in Los Banos, and then we’ll do a Fannie Mae stabilization loan and hold it for five years. We’re doing that for a fee, and then we’ll have a percentage of the profits when the product is sold. We have never done any of that before.

SIMONSON: Part of what strikes me as you’re speaking is how intense that

workload is for one project.

UHLER: So far we haven’t seen that much of a freeze from the FDIC in terms

of decision-making. We have seen a freeze on the financial side of it. They weren’t funding legal costs, costs of foreclosure, restructuring consultant’s costs, which causes the other banks to fund their share of the costs. In some of these syndications, we are spending tens of thousands of dollars on these consultants, so it’s not a minor consideration.

SIMONSON: Are you talking about private individuals or big companies?

HUNTLEY: I’m talking about private individuals. But if you look at what’s happening

to the publicly traded REITs [real estate investment trusts], it’s similar. They’re getting hammered, but not because their occupancies are down. They have gone from 93 percent to 91 percent. But if you look at their stock prices, they have gone from $70 to $7. That’s because of the financial markets, not because of the cash flow in the company. They don’t have a negative net worth, but it is pretty skinny. The market doesn’t have a high confidence level that lenders will be in a position to renew and/or extend loans, so the borrower will have a problem because the lender has a problem.

16 theregistrysf.com

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UHLER: Yes. It is the same for the bank if we take a property back.

HUNTLEY: Elizabeth described one of the more complex projects.

SIMONSON: So that’s atypical?

SHEPARD: I wouldn’t say it is atypical. I think there are plenty of those situations.

HUNTER: The partially completed project is probably one of the biggest challenges. From the lender’s perspective, if you are taking it back you have to analyze what liabilities you are taking on, and actually one of the hardest things to do is to get full and complete insurance coverage and make sure there are not any gaps in your coverage, which means you drill down on all the underlying construction contracts and look at the warranties, indemni-

p h o t o s by s i dne y er t h a l

HUNTLEY: I think the reality is if you just use reasonable leverage, not even unreasonable leverage, a lot of quality, sophisticated borrowers have a negative net worth today. The only question is what do you do about it. You have got to come up with a program that’s better than liquidation. And if you can do that, I think most lenders, as long as they can verify that you’re not hiding anything, will do what makes sense. It’s basically minimizing your losses and maximizing your recovery. We’ve had clients that had several hundred million dollars’ net worth that are now under water several hundred million dollars in three years.

posure anymore, but we have significant lease up exposure. So, we are there 24 months in. We’ve managed to get a lot of properties constructed working with these sponsors that maybe we propped up just to get it done. But the lease up portion of it is a matter of the overall economic demise really.

SIMONSON: Presumably it is better to have a finished building than it is to

have something that’s halfway completed?

UHLER: Absolutely. A partially completed building has truly zero value in

today’s market.

HUNTER: And with liability, it could be negative.

SIMONSON: Go back to something that you were talking about earlier where

you have the original borrowers still managing their troubled projects. Is that happening a lot? Do you see that as kind of the next phase? ties and insurance that is there. We find that on the legal side, regardless of which side we represent, that on a partially completed project, we spend a significant amount of time looking at the insurance and liabilities.

UHLER: From our perspective because of those issues of partially completed projects, we work really hard to keep our existing client/sponsor/developer in that deal even if we have to continue paying them. They are, normally speaking, the best people to finish the project.

SHEPARD: Wow, that’s great. I don’t hear that from a lot of lenders.

HUNTLEY: I would agree with Joan. The borrower needs to do something wrong to have the lender say we need to get them out.

SHEPARD: But don’t you also require some sort of huge margin call to con-

HUNTLEY: It’s going to depend on the lender. Every lender has different is-

sues, so they have a different agenda on how to solve the problems. One end of the spectrum is what I just outlined, the large national lender on the Bay Area project. That lender has a high regard for the borrower, and the borrower is now going to make the lender a lot of money because they took this write-off six months ago. The other end of the spectrum is other national lenders that we deal with where it’s nothing personal, but they are going to flush this stuff through their balance sheet because they have balancesheet issues, and they’re borrowing money from the Feds, and so what they want to do is foreclose on everything, sell it, then deal with the guarantors and take the cash payment for a portion of the deficiency, shake hands and go home.

tinue to work with them or some sort of additional collateral?

UHLER: It varies from project to project, but it will effectively look like a fee-

build situation. We won’t let them keep the upside of the project, though inherently usually there is no upside of the project any way. There’s some where there is upside, and it’s simply because of the size of their organization, lack of financial planning, or for whatever reason they simply don’t have the cash to carry their organization. So that might be a different story, and it would be a different negotiation. But generally speaking, what we are going to say to them is, ‘Look, you’re effectively bankrupt. You need to liquidate your entire business. We will keep you alive for our share of the project.’

HUNTLEY: I don’t want to sound like everything is doom and gloom. We’ve

got clients where seven months ago we did a restructure, and they must have written down $30 million on a handful of projects. That same bank is working with the same borrower because they didn’t take the projects back. Now they’re making new loans, and the borrower is monetizing finished lots at $200,000 each. In that case, the bank is going to get back $20 [million] to $25 [million] of the $30 million and now book $20 [million] to $25 million worth of earnings because they already took the $30 million hit six months ago, and that’s going on right here in the Bay Area.

HUNTER: There’s an issue too about the amount of time that something takes

versus the total dollar volume of bad loans that you’re working on. So, to take perhaps the [simplest] example: There is a lot of nonrecourse debt out there, and as long as the borrower doesn’t do anything to violate covenants, then if the project is under water, they can simply let the bank foreclose. So, in some ways the dollar value is, in that instance, not connected with the amount of work that it takes, and as far as these things go, relatively painless and not very time-consuming.

UHLER: I only work with the Western U.S. portfolio. I don’t have details on

the Eastern U.S., but we don’t have a huge percentage still under construction, but what we do have, which is equally troublesome, are properties in lease up or for sale. We may have just finished construction last fall, and it’s an office building that has zero tenants or a retail building that was pre-leased but none of the tenants occupied. So, we don’t have as much construction ex-

getting

on

deal

SIMONSON: The other thing that I have furiously tried to tap into is the

world of is loan sales. I hear people say that there are tons of loans on the market for sale, but I don’t see a lot written about it. Is there something secretive about it?

UHLER: There is a note sale market.

SIMONSON: Is it robust?

UHLER: I’m not sure if I’d characterize it as robust. There are sufficient inves-

tors in the market and no longer sitting on the sidelines.

HUNTER: Joan, what’s the ideal candidate for your bank to sell the note as

opposed to any of the other remedies available to you?

UHLER: It’s pure economics. We are looking at every option related to every

“I don’t believe there will be [price] stabilization [in loan-sales] until there’s some expectation that product is limited, just like any market.”

Joan Uhler, senior vice president, KeyBank

loan. If we have the capability, and we think there’s a secondary market, we’ll take it out to find out what the secondary market execution is. Most of the large banks are doing the same thing. They are not taking loans out on a portfolio basis. The FDIC will bring some [loans] out later this year, I expect on a portfolio basis.

SHEPARD: In October.

UHLER: But I know very well that some of our colleague banks have taken

notes to the market, either by talking to people internally or talking to people who are buying our notes. We have gotten a lot of note sales done in the first o ct o ber 2 0 0 9

theregistrysf.com 17

Commercial Market Update half of the year, and we continue to.

SHEPARD: In my experience, the community banks would much prefer to

sell a note than to deal with it.

HUNTER: Yes.

UHLER: Community banks are not big enough to manage properties.

But there’s been an aversion on some of the smaller banks’ side to selling the notes because it’s an immediate loss, and their balance sheets can’t handle it.

HUNTLEY: We have dealt with a lot of lenders on note sales, but the problem

we have seen over the last 12 months is the lender wants this and the note purchaser wants that, and nothing happens. Six months go by, the lender decides to take the previous offer, and the purchaser says no, the market has gone down, so the bid-ask remains and it’s not a small gap. It’s a big gap.

SIMONSON: Big is what?

HUNTLEY: Fifty percent. There are financial institutions buying FDIC notes.

We just concluded a transaction with a note purchaser, a bank, and the FDIC stayed in as a participant on some arrangement [that] we are not aware of.

SIMONSON: What are you seeing in terms of the discounts that the market

is demanding on real estate loans?

HUNTLEY: I think it’s anywhere from 10 cents on the dollar to 80 cents on the

dollar, depending on the asset securing that note.

HUNTER: I think there’s a whole group of people who want to buy distressed

debt at 20 cents on the dollar, but the debt they want to buy is [backed by] 100 percent occupied real estate with credit tenants with long terms remaining, and nothing is getting done. On some of the note sales that we’ve represented parties on within the firm, it’s the partially completed projects where I think there’s a closer sense of reality between buyer and seller, the seller being the bank, because everyone understands that the partially completed project has the most liabilities.

beauty

the

SIMONSON: So, [as a region], how are we doing compared to other parts of

the country?

HUNTLEY: I am going to answer that in two ways. From a debt restructuring point of view, we’re doing work primarily in the Western states, and we’re seeing certain submarkets already reset. From a lease restructuring standpoint, we handle things nationwide except for Alaska, and we’re seeing that there are a lot of markets nationwide that are doing just fine. We are in California and we have been hammered, as have a few other states, but there are a lot of states that are doing pretty well. When we look at the portfolio of a publicly traded retail or restaurant client, 10 percent, maybe 20 percent of their sites have issues. That means 80 percent are doing just fine.

SIMONSON: Which means the business fundamentals are there?

HUNTLEY: Yes. But if you happen to be in a few selected states that have suf-

fered a disproportionate share of what’s going on, it’s going to take longer for those states to correct.

SIMONSON: Do you count California and Northern California in that?

HUNTLEY: Yes. But at the same time, there are some [Bay Area] markets that are already resetting. Walnut Creek is not resetting, but it is very close, for instance.

SIMONSON: Joan, are you able to make that comparison?

UHLER: In general the Bay Area didn’t experience some of the fundamental

especially for stabilized assets?

economic issues that other parts of the nation experienced as it relates particularly to commercial real estate in that our job loss has not been extraordinary. We also have accumulated wealth in the Bay Area that helps prop up housing, and by default the housing supports other areas. Other than when you get out to the further reaches of the East Bay and down the Central Valley, the supply was never over-built in many product types. I think retail in the Bay Area is probably the one piece that is pretty heavily damaged. I think we have got a long haul, less so in California, more so in the Western United States.

UHLER: I don’t believe there will be [price] stabilization until there’s some ex-

SIMONSON: And what’s long?

SIMONSON: When is there going to be some agreement on what values are,

pectation that product is limited; just like any market. And the product that people expect to be out there in terms of notes for sale continues to be huge.

Whether it comes to fruition or not, we don’t know, but the expectation,

UHLER: I think it depends on what happens with the TALF [Term AssetBacked Securities Loan Facility] and then Wall Street coming back and the rating agencies. I say that because I think just straight balance sheet kind of assets are what’s driving the downturn now, both banks’ balance sheets and sponsors’ balance sheets. We have got huge maturities on highly leveraged, poorly-structured loans coming up in the next couple of years. Unless the CMBS market comes back, we’re going to get hit, and if it doesn’t, I’m thinking four to five years. There has to be some [source of ] permanent financing.

We have no permanent financing in the marketplace today for commercial real estate.

particularly with the FDIC already taking over large portfolios of loans and the expectation that they will continue to take over new banks for a period of time and have loan portfolios to sell. People are waiting on the sidelines to buy portfolios that they’ll do partial due diligence on, but who cares if they can get it for 10 [cents] or 20 cents on the dollar.

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that what we are really looking for on the home building side is the return of the organic or natural home buyer, not an investor looking to snap up the property and hold it for a few years. The other interesting thing is that there are definitely residential neighborhoods that have not been anywhere near as impacted as others. So you have pockets where values have remained relatively flat or close to where they were, so it really presents a fractionalized picture on the residential front.

UHLER: And those people buying now who are investors, they’re going to put

the houses back on the market as soon as the market starts to turn. So this excess supply could continue for a little while until, as Chris points out, the natural buyer is the true buyer. n

p h o t o by s i dne y er t h a l

HUNTER: I think it depends on the sector and the specific location. I think

a b at e m e n t

to d e v e lopm e n t Measures on the table in San Francisco don’t go far enough.

p h o t o by C h a d Z i emendorf

B Y S t e v e A t k i n so n

ust a few years ago, San Francisco was in a construction boom, with dozens of residential projects in progress or working through the lengthy entitlements process. Now, construction has almost ground to a halt.

Approved projects representing thousands of units show no sign of proceeding, and although some project sponsors are still pursuing entitlements, few expect that any will begin construction soon. This slowdown is hurting the city, resulting in budget reductions and layoffs in the planning and building inspection departments, reduced contributions to affordable housing and a severe decline in construction employment.

Of course, the causes of the current slowdown arose outside San Francisco—the difficulty of arranging reasonable financing is a nationwide problem as is the collapse of a real estate bubble and a recession that is sapping jobs and wages. But, even during economic booms, San Francisco is a difficult environment for development. Developers, and their property buyers and lessees, are subject to large impact fees intended to accomplish various social goals, including building affordable housing and improving transportation, parks and other public infrastructure. While the hot housing and commercial real estate market of recent years led many developers to undertake projects despite these burdens, these costs no doubt still dampened development, as do the length and uncertainties of the entitlements process. In today’s much weaker market, these costs are clearly stifling recovery.

For several months, city officials, including representatives of the mayor’s office, have been working to refine measures that would help to stimulate development. These measures, expected to be introduced in September, are intended to mitigate some of the costs that make San Francisco development so expensive.

The efforts are commendable and should have the effect of helping some projects become viable sooner as the economy recovers. However, for most projects, despite the modifications, San Francisco’s impact fees will remain a significant deterrent.

San Francisco’s experience with impact fees began about 30 years ago, with adoption of a transit impact development fee. Since then, additional levies and requirements have been added to subsidize affordable housing, build and expand parks and child care, and over the past five years, to bolster infrastructure or socio-economic benefits for specific neighborhoods.

For a downtown office building, these impact fees total $33 a square foot or more. Based on today’s rental rates, it could take an office landlord an entire year of lease payments on every square foot of a building to make up for that expense. The impact fees for residential units are even higher. A one- or two-bedroom condo or apartment carries with it inclusionary (i.e. affordable) housing and school-district fees in the range of $75 a square foot. Depending on the neighborhood, additional impact fees ranging from almost $5 a square foot in Visitacion Valley to $25 a square foot in Rincon Hill would be imposed for new housing.

Almost all of these fees are now required to be paid before site permit, years before a project would produce revenue. The result is a substantial up-

front burden on new development. Even where the city undertook financial feasibility analyses of these fees, most of the analysis was completed during very favorable economic conditions for developers that are unlikely to return for many years, if ever.

Several new approaches are under consideration. Under one current proposal, all impact fees could be payable much later in the construction-permit process. Or, if a project’s sponsor elected to pay a small deferral surcharge, the payments could be put off until the first certificate of occupancy, which could be up to two years later. Packaged with the deferral would be measures to standardize and make transparent fee payments. These are reasonable reforms but do not add any stimulating effect because they simply delay rather than reduce the fees.

Another idea revolves around so-called Mello Roos community facilities districts. While CFDs are widely used in suburban development to pay for infrastructure, they have rarely been used in San Francisco. Under the proposal, after a district is established, new developments could be annexed as time goes on. Once a project joins, infrastructure costs would be financed by bonds then repaid by the new residents over time, as part of their annual property taxes, rather than up front by the developer. However, after the CFD is set up, add-on projects could face another $250,000 expense related to their annexation. Consequently, this mechanism would not be practical for smaller projects. Also, this option would not apply to inclusionary housing fees.

Under a different proposal, project owners could record a community benefit covenant for new projects. The covenant would add a permanent additional transfer tax of 1 percent of the price to each subsequent property sale. In return, the developer would be entitled to a partial reduction or rebate of the inclusionary housing fees otherwise due, equal to the net present value of the projected future transfer taxes. This could result in a roughly 25 percent to 35 percent reduction of the in-lieu housing fee that would otherwise be due.

All of these measures, if adopted by the Board of Supervisors, will somewhat reduce the impact fee burden. But in the short run, they are unlikely to encourage any new development until economic fundamentals improve. In the longer term, it is probable that these changes will help some otherwise marginal projects proceed. And, as economic and financing conditions improve, these changes should help projects become viable sooner than would have otherwise been the case.

However, even with these improvements, San Francisco’s impact fees will continue to delay development and the economic stimulus that we would all like to see. The most significant fees, including the inclusionary housing requirements and the neighborhood impact fees, were adopted or increased based on economic analyses completed during the recent bubble years. New analysis factoring in sharply reduced market prices almost certainly would show that the impact fees are unduly burdensome, even taking into account the proposed modifications in the fee process.

In addition, the proposed stimulus measures have no value to projects that elected to meet their inclusionary housing requirements with on-site units.

Ideally, the legislation would allow projects originally approved with on-site inclusionary units to elect to satisfy all or part of their requirements through deferred in-lieu fees or benefit covenants.

The reforms that are considered are useful and worth adopting. However, the city should evaluate immediately the entire structure of impact fees to determine if the requirements adopted at the peak of the boom are sustainable or truly help to build the community we all want. But, whether San Francisco politics, which acknowledges economic reality only now and again, will allow the necessary adjustments needed to engender a healthy level of development is very unclear. n Steve Atkinson can be reached at 415.356.4617 or satkinson@luce.com.

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Commercial Market Update

David Taran, a regional developer, is struggling to hang on to more than 100 properties he acquired with renewal in mind.

B Y S haro n S i mo n so n

hen developer David Taran began buying old apartment buildings, single-family houses, land, duplexes and even a store in East Palo Alto three years ago, a grand plan motivated his movements.

Backed by $243 million from Wachovia Bank and $100 million from the California Public Employees’ Retirement System, the middle-aged lawyer kept a color-coded map of the 140 tracts he wished to buy.

Never could he have conceived where he finds himself today. Sept. 30, Taran and his team of lawyers will face San Mateo County Superior Court Judge John L. Grandsaert to argue why control of Taran’s mushrooming empire should not be ceded to a receiver.

It is perhaps fitting that Taran’s immediate fate will be decided in a courtroom. It is a place he seems to feel comfortable pursuing his business goals.

San Mateo County court records reveal his firm, under various names and via various companies, has sued, countersued and been sued no less than 30 times since July 2006, the month that CalPERS agreed to invest in Taran’s fund, Page Mill Properties II. In most instances, the trove of public records produced by such prodigious litigation would reveal much about the man or at least his business intentions, and in some ways they do. But Taran is a secretive actor who jealously guards what one of his attorneys has defended as the “trade secret” of his business plan in East Palo Alto. Court documents are routinely sealed and redacted; settlements are not public. Attempts by rival lawyers, rentcontrol advocates and journalists to attain explanatory documents, even documents pertaining to CalPERS, a public agency, have been met largely with frustration.

But, as time passes, with more court hearings and legal documents and public records filed nearly by the day, Taran’s plans and expectations inexorably, if slowly, are being revealed. It is evident that they are substantial.

Whether they will ever come to fruition is another question.

Taran’s efforts in East Palo Alto have been complicated by an aggressive and persistent grass-roots campaign led by the EPA Fair Rent Coalition. Tenants, represented pro bono by attorneys Robert Hawk and Ryan Marsh of Hogan & Hartson in Palo Alto, have sued Page Mill to contest rent increases in a subset of the company’s 1,800 rental units. In a Sept. 1 hearing, tenants won a decisive court ruling to bring the city’s rent-control ordinance back into effect on their units. During the hearing, attorney Hawk described Page Mill’s tactics as a “strategy of radical gentrification” that involved a mission, conceived by Taran, “to buy up most of the rental properties on the west side of [U.S. Highway] 101 in East Palo Alto.”

All of the properties sit in tight clusters north and south of East Palo Alto’s star redevelopment, University Circle, home to a Four Seasons Hotel and restaurant and four top-quality office buildings. They also are adjacent to Palo Alto, one of the South Bay’s most exclusive communities with pacesetting real estate values.

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Reporter Jon Peterson contributed to this article.

p h o t o by C h a d Z i emendorf

Gentrification’ in Palo

While Page Mill has acquired 101 properties that are collateral for its Wachovia loan, court records in an unrelated case indicate that Page Mill’s expectations had been to purchase 140 properties or more. During a 2007 court hearing involving a former Page Mill real estate agent, opposition counsel Ron Rossi described the company’s plans as expansive. According to Rossi, Page Mill sought to buy properties for a full half mile north of University Circle up to the Menlo Park line and a full half mile south to the border of East Palo Alto. Later in the same hearing, he tells the court, “The deal as I understand it, when complete, will be a $1.6 billion acquisition.”

Rossi goes on to argue that Taran’s so called trade secret business strategy was far from secret. Rather, it was an obvious effort to jump on a renewal bandwagon that had been gathering force for years in East Palo Alto. Rossi concluded, “ …[T]hat is going to be an area of lots of affluent people there.”

Page Mill’s attorney Jeffrey Brown of Los Angeles law firm Pircher, Nichols & Meeks did not contest Rossi’s characterization. Indeed, during the same hearing, Brown described Page Mill’s goal in East Palo Alto as creating “an assemblage or collection of various properties for development purposes.”

A sampling of the property bought and the prices Page Mill paid for the East Palo Alto parcels also suggest that Taran had far bigger fish to fry than simply buying and holding a cluster of aging rental properties. According to San Mateo County tax records, his purchases include raw land and a neighborhood convenience store. One of his first acquisitions was a 600 squarefoot house built in 1926 and situated on 12,000 square feet of land. He paid $1.55 million, or a little shy of $130 a land foot, for the site. That is well above $5 million an acre, lofty even by Silicon Valley standards. Other land prices were even higher.

How the situation evolves from here seems impossible to predict.

The judge’s temporary order signed Sept. 9 to appoint receiver David Wald to manage the Page Mill portfolio expires the day of the Sept. 30 hearing. The judge is expected to decide that day whether to install the receiver more permanently. CalPERS, which has written down the value of its investment by 40 percent, is not expected to invest more equity. And Wachovia, now owned by Wells Fargo & Co., is demanding repayment of its $243 million plus interest. Perhaps tellingly, the bank has not filed a notice of default on the loan, though it states in court filings that a $50 million payment due Aug. 4 has not come in. A notice of default is the first step in the out-of-court foreclosure process. Nor is the bank seeking foreclosure as part of its effort to have a receiver appointed.

CalPERS declined comment for this story; publicists for Page Mill Properties did not return calls.

In its temporary order, the court did direct receiver Wald to “resolve any pre-existing lawsuits, including but not limited to those involving the [c]ity of East Palo Alto.” That may take longer than the 21 days initially at the receiver’s disposal. n

th e

storm

Property managers should dedicate themselves to several years of ownership distress by committing to the community.

BY J o e L e w i s

he commercial property management profession as we know it in Silicon Valley was created in the chaos of the mid-1980s by an economic Big Bang. The commercial real estate industry now faces another defining natural event, what some might call an economic tsunami. While many market participants will experience tremendous pain and some will be washed away, property managers should have the means and responsibility to hang on.

In 1982, economic forces brought the following conditions to a beautiful valley south of San Francisco: acres of entitled land in master-planned industrial parks, concrete tilt-up construction, tax law that dramatically shortened depreciation schedules for real estate, bank deregulation and a rapidly growing electronics industry.

Local developers controlled the Silicon Valley real estate world at this time. These relatively small, nimble firms built the master-planned industrial parks; they sold lots to other developers and corporate users. Meanwhile, contractors refined the techniques of rapid concrete tilt-up construction.

From 1982 into 1987, millions of square feet of new buildings were built, fueled by lots of easy credit. The professional commercial brokerage community emerged to serve the business created by developers and their prospective tenants. Commercial brokerage ranks swelled to 900 brokers. Out of these firms came many of the leaders of the next generation of real estate players. The San Jose office of Grubb & Ellis spawned so many real estate luminaries that it was referred to as Grubb Prep School.

By 1987, overbuilding was rampant and vacancy up dramatically. The overcapacity combined with tax law changes to create a recession that decimated the industry for nearly a decade. Buildings built with 100 percent financing earned the nickname neutron bomb because the developer was gone but the building remained. Tenants, developers and lenders went under. The brokerage ranks thinned to less than 400.

Lenders, financial institutions and the government crisis agency known as the Resolution Trust Corp. emerged as commercial real estate’s new ownership class. These new owners discovered what so many new owners of real estate discover: The property has to be managed. But they did not have staff or expertise. A new class of professional property management companies and individual property managers emerged to meet this need.

This new professional class reported to a financial institution, and the new owner wanted reports, lots of reports. Fortunately, this period coincided with the development of the personal computer and spreadsheet programs enabling these managers to produce the kind of detailed and statistical information sought. At the same time, the brokerage community rose to the occasion by collecting its own statistics and producing regular market reports for the first time.

Not until the mid 1990s did the industry recover. By then the professional property manager was well entrenched, and the new class of developers were

largely institutions themselves or strongly influenced by institutional partners.

Today, Silicon Valley contains nearly 300 million square feet of office and industrial buildings constructed over the last 30 years. Based on an average property manager handling a million square feet, there are approximately 300 professional managers in the business. Property management firms fall into three large categories: owners, brokerage firms and boutique firms. Of the 10 largest firms in the valley, four are owners, three are brokerage firms and three are boutiques. Like in any other industry, in this one, too, the top 20 percent of the firms have the majority of the business and the top 20 percent of individual managers lead the industry.

Property managers now face such stormy conditions as rising vacancy and unemployment, declining economic conditions and maturing building loans that cannot be refinanced. It is becoming obvious that this storm is bigger than most we have experienced and may last quite a while. The owners and lenders of many properties will go away, some voluntarily, some not.

However, once again, the buildings will remain and must be managed. Not only are the financial interests of owners, lenders and tenants at stake, but also the well being of the community is at issue. The property manager has the opportunity to be a port in the storm for the greater good. We also have the chance to mine the situation for new lessons and better business practices akin to those learned and adopted in the late 1980s and early 1990s.

During the equipment failures of Apollo 13 in April 1970, a sentiment of imminent disaster began to build. Mission Control’s veteran Lead Flight Director Eugene F. “Gene” Kranz changed the tone when he said, “Failure is not an option.” Those who care for buildings now face a similar moment.

The owner may not be able to hang on. The lender may not refinance, but the building will still be there. In a few years, we will look back on this storm and tell our stories. It would be nice to be able to say it was our finest hour. n Joe Lewis can be reached at 408.922.0400 or jlewis@orchardcommercial.com.

The property manager has the opportunity to be a port in the storm for the greater good.

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Commercial Market Update

t e st i n g Out of cash and options, Petaluma City Hall hires private-sector planners to process development.

n July 21, the North Bay town of Petaluma, population 60,000, outsourced its planning department to the Metropolitan Planning Group in Mountain View.

M-Group provides contract planning services to about 15 Bay Area communities, including Milpitas, Palo Alto, Redwood City and Santa Clara, said Geoff Bradley, a company principal. In those communities, his firm supplements the work of staff planners.

In Petaluma, however, M-Group will be the planning department, performing all daily administrative functions such as permitting and project approvals as well as working with the Planning Commission and City Council as items come before them for approval. The city retains a single planner in-house who is responsible for all forward planning, such as updates to the city’s housing and general plans.

“Planning has historically been a delicate area where you don’t want to just grab someone off the street and say, ‘Plan my community,’” Bradley said. “You want someone who has a sense of history and knows what the place is about.”

As municipal budgets strain under the cost of services, that standard may not always hold true any more.

For many communities, city planning has become a revenue source. But with the drop-off in home construction and commercial development, cities are watching their planning revenue dwindle. Departments are suffering their worst staff cutbacks since the dot-com crash. San Francisco Planning, which gets about 85 percent of its budget from fees, saw a 30 percent drop in fee revenue in 2009, said Planning Director John Rahaim. A $300,000 appropriation from the city’s general fund and some grant money helped the department balance its $20.9 million fiscal 2010 budget, but eight positions have been cut from its 160-person staff. In San Jose, fee revenue fell by 35 percent last fiscal year, says Joe Horwedel, director of city planning. Over the last three years, San Jose’s planning staff has contracted by 100 people to 250 today.

Petaluma’s approach to the dilemma may turn out to be an outlier; however, it may also be viewed as the avant-garde of structural change in California cities.

Petaluma City Manager John Brown said he didn’t start with a goal to plow new ground. He simply sought to solve a revenue problem. His council had asked that he bring planning back in-house when the time is right; he has asked the council to remain open-minded. Brown understands that M-Group’s Bradley sees Petaluma as a case study to test a business model possibly at the forefront of a much larger transition, and he is not opposed to playing that role.

“I didn’t set out to be a trendsetter,” says Manager Brown. “I am faced

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p h o t o by C h a d Z i emendorf

B Y R o b e rt M ull i n s

$1,250

$1,000

“I didn’t set out to be a trendsetter. I am faced with providing a service that I can’t go without in a way that won’t impact a general fund that can’t absorb any more.”

John Brown, Petaluma City Manager

“The service level has dropped, attitude has gotten horrible, and it’s just a miserable environment,” Cox said. “We’re paying more for less service.”

Not all cities are suffering. Sunnyvale has seen a dip in building permit applications, said city spokesman John Pilger. It forecast issuing 1,375 permits for the fiscal year ended June 30, but fell short by 17 percent. A report from the Construction Industry Research Board shows that the value of Sunnyvale building projects for which permits were issued was $90.3 million for the first six months of 2009, a 73.5 percent drop from the $340 million in the same period of 2008.

The planning department’s current budget of $2.14 million is up only slightly from last year’s, and while Sunnyvale hasn’t laid off any of its nine full-time planners, it has cut part-time and contract positions, Pilger said.

Up the peninsula, Redwood City remains “extremely busy,” said Tom Passanisi, principal planner. While CIRB numbers show a 65 percent

$750 Less

ahead

Cities across the Bay Area are cutting planning staff $500 and services because work volumes have collapsed as development slowed. $250

Dollar-value of residential and $0 SAN SAN SANTA ALAMEDA CONTRA nonresidential building permits FRANCISCO MATEO CLARA COSTA in the first six months of the year $1,500

$1,250

$1,000 in millions

with providing a service that I can’t go without in a way that won’t impact a general fund that can’t absorb any more. I personally wouldn’t be unhappy keeping the M-Group on as long as the model works efficiently.”

Critical to that will be good communication between the in-house, forward planner and the M-Group, Brown says.

In the fiscal year before the M-Group came on board, the city’s Community Development Department embarked on a mission to become a so-called “enterprise” operation largely funded with fees, Brown says. The city still planned to supplement the department’s fee revenue with about $400,000 from the city’s general operating fund, or about 20 percent of the department’s overall costs. The fees never materialized, and the city was forced to take another course. This fiscal year, Petaluma expects to pay M-Group $40,000 from its general fund, Brown says, cautioning that it’s not the same as having a full-time community development department.

“I am spending more time now on planning myself,” he says. The scope of work assigned to M-Group includes “the kind of stuff that you need someone to sit down with to kick it around a while,” he says. But “you have to be more efficient and reserved about how you use that time.”

To operate with fewer people, the San Jose Planning Department stopped making appointments. Instead, the staff serves developers and builders on a first-come, first-served basis. Horwedel acknowledges the wait can be long: “They may have to spend the afternoon with us.”

The city, despite raising fees, also is delivering more services online.

People can schedule appointments for an inspector to come out and review a project, he said. Although 80 percent of appointments are still made by telephone, the city employs fewer people to take them.

The upshot for some is huge levels of frustration. San Jose architect Steve Cox is designing a 17,000-square-foot retail development along Monterey Highway in San Jose. The property owner paid the city more than $100,000 for a permit to bury utility lines rather than string them overhead. The fee was 73 percent higher than a year ago. “This just drives me insane,” Cox said.

Also upsetting to Cox is the time it takes to get permits. With staff cuts, a permit that took three to four weeks to obtain in San Jose now takes twice as long, he said.

-49.4%

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$500

-38.7% -69.2%

-35.7%

-33.2%

$250

$0

SAN FRANCISCO

2008

SAN MATEO

2009

SANTA CLARA

ALAMEDA

CONTRA COSTA

% Year-Over-Year Change Source: Construction Industry Resource Board

drop in the value of projects for which permits have been issued in this year’s first half, there are also high-profile projects underway, including a new Kaiser Permanente hospital, a 12,000-unit residential development on the Cargill salt flats and a Stanford University office development along U.S. Hwy. 101, he said.

The city also has seen developers coming in for early-stage permitting for projects that await financing, Passanisi said. A lawsuit has stalled the city’s redevelopment plan for its downtown, which calls for higher-density and taller buildings, he said. But when legal hurdles are cleared, he expects five downtown and waterfront projects to move forward, with the prospect for more development next year.

Likewise, Walnut Creek seems to have been hit less by the downturn, said Pankti Clerk, an economic development specialist in the planning division of the Community Development Department. The city has not laid off any full time people but did let one part-time employee go earlier this year. It froze three other positions when they became vacant, she said. CIRB numbers show permit activity fell 33 percent in the first half of 2009 from the year ago period.

M-Group’s Bradley predicts economic recovery early next year, and he does not appear worried. He thinks his company may see an increase in contracting work before cities hire more staff.

“They’re going to be shy about bringing on more permanent staff, adding to overhead and making the long-term commitment, so they will probably be looking to consulting firms to hire,” Bradley said. “They can get us there with a phone call.” n

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employment

Power to the People Three real estate chiefs focus on their teams to achieve corporate success.

By Matt Slepin

Clockwise: Hamid Moghadam Christopher Peatross Connie Moore

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W

hile the larger economy is turning the corner, commercial real estate has significant time left in the doldrums. Our conversations have changed from how to weather the storm to hunkering down for a long one. Three chief executives running some of the region’s most noteworthy companies are plotting their course forward and refining their strategies. AMB’s Hamid Moghadam, Equity Office’s Christopher Peatross and BRE’s Connie Moore are preparing their businesses now for the inevitable recovery, including a heavy focus on the human-capital side of their businesses.

Although none of the three were willing to promise no additional layoffs, it appears each company has pared as far as it need go. AMB Property Corp. lost about 30 percent of its workforce over the last twelve months. In the first three quarters of 2008, the company added some 250 employees, reaching 850 at its peak; the count is now back to what it was when the ramp-up began. In contrast, BRE Properties Inc. cut only about 4 percent of its workforce. But, 40 percent of those let go were in the company’s development and construction groups.

Equity Office Properties is the roll-up of three major office companies acquired during the property boom by The Blackstone Group: CarrAmerica Realty Corp., Equity Office Properties Trust and Trizec Properties Inc. Carr and Equity Office both brought Bay Area portfolios. Blackstone attained operating efficiencies in the merger through job cuts as it combined the companies and kept “the best person in each market and in each role,” Peatross said. They also had a round of recessionrelated layoffs in September 2008. Moving from public- to private-company status enabled EOP to eliminate expensive financial-reporting requirements and the associated overhead.

While each company occupies a different sector of the commercial market, their leaders’ thinking is remarkably harmonious on the prudent path forward. Headline number one is all about employee communication. “You cannot over communicate, particularly during difficult times,” says Moore, whose

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company owns and manages more than 20,000 apartments, mostly in California. Under her Connecting with Connie initiative, she meets with all officers in the company individually to understand the challenges they face, opportunities they see and to find ways to achieve their goals. Moore also stresses their annual Associate Engagement Survey, which is aimed in part at reducing staff turnover, a perennial and costly problem in the apartment industry. This year, participation in the survey increased dramatically, and staff turnover has reduced as well.

Moore understands that the recession is a factor in the lower turnover but is focused on what will perpetuate the trend and maintain goodwill going forward.

Because AMB is a global industrial real estate company with interests in 14 countries, management has had to develop innovative ways to keep in touch with each other and with workers. Moghadam has visited the vast majority of the company’s offices worldwide in the past twelve months and, since the beginning of the crisis, has updated their global workforce on company developments with a series of videos, initially released roughly every other week. He also participates in one-on-one lunches with every officer in the firm at least once a year. Moghadam stresses the importance of having a clear message worthy of repetition. His three goals to get through the downturn are to develop a strong balance sheet, to get the industry’s most competitive cost structure and to preserve energy in the team to launch a strong offensive as the market recovers.

Headline number two is an absolute focus on blocking and tackling. Everyone knows that money will be made during the downturn not through financial engineering, cap-rate compression or development, but through operations. Apart from getting the balance sheet in order, it will be about execution at the corporate and property level. Two of these companies, AMB and Equity Office, reorganized several years ago, moving from functional, silo-shaped operating models to regional models. For AMB, decentralization became a necessity given the scope of its world-wide portfolio.

For Equity Office, the reasons behind the change were more nuanced. The approach differs dramatically from that of company founder Sam Zell. Under Zell, Equity Office embraced a centralized business model, where major (and sometimes not so major) decisions were made in the corporate headquarters then delivered to local market operators.

Peatross decentralized the company, empowering a strong executive in each region to run all aspects of the portfolio from leasing to property management to capital expenditures. He would vote for this business model (which is much closer to CarrAmerica’s, Peatross’ prior firm) in any case, but in particular sees it as a much better business model today. It allows “absolute accountability,” he says, and a better focus on what matters in the business now: tenants, occupancy and cutting costs.

He believes it allows everyone to align behind the mission, giving people buy-in and a business model they can trust.

BRE also is focused on operations, but in the apartment business Moore believes the focus should be on wringing out efficiencies by leveraging size, scale and technology. BRE has centralized many functions to allow site staff to focus exclu-

sively on property-specific tasks key to the company’s health: leasing, customer service and maintenance. There is no longer an administrative function at the site level. Instead, BRE is trying to create a new property management paradigm using information-technology advances. “We knew that the Web was going to change the way we did business; it continues to provide efficiencies, so we can focus on our core competencies on-site,” Moore says. She sees a major competitive advantage from investment in the company’s operating platform, including a sharp focus on technology. Headline number three is that business practices and compensation models are now clearly based on long-term performance. There is an understanding that short-term flips allowed by cap-rate compression and the merchant-build model are dead, at least through this cycle.

With this in mind, each of the three companies made job cuts but then rallied around the remaining team with fair pay and benefits. AMB considered shrinking its benefit package but decided that the marginal savings were not worth the cost to morale. The executive team and several members of senior management did voluntarily reduce their salaries. Moghadam spoke about the “importance of keeping offensive players happy and engaged.” Moore asked the question, “How much institutional knowledge are you willing to lose and willing to keep?”

The CEOs are clearly pursuing cost savings and repositioning their workforce with the knowledge that they are in it for the long haul and that they want to be in a strong position when

the cycle turns.

REITs, which lost out to private equity during the last cycle on the sex appeal of its compensation, also seem to be back on top. The REIT model of stock-incentive compensation re-prices quickly, while people at private-equity funds have their compensation tied up through the life cycle of their fund. A senior executive whose interests are linked to a fund that made the lion’s share of its investments from 2005 through 2008 might be underwater for the life of that fund. Since REITs’ stock options are re-priced each year when granted, some years are underwater, but this year and last (as well as the years during the upturn) still should look pretty good.

None of the headlines is a surprise. But we were impressed in talking to all three CEOs with the breadth of the issues they are addressing, their holistic approach to business success and the consistency among all three on where they need to focus now: communication, blocking and tackling and long-term perspectives. These mantras are not new because they are all smart business practices.

Our industry has matured considerably since the last major downturn. Now we have major operating platforms that are here for the long haul and that will survive and thrive through this Great Recession. n

The tenets of today’s market are: communication, blocking and tackling and long-term perspective.

Matt Slepin can be reached at 415.433.2016 or matt@terrasearchpartners.com.

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green

Green, as in Money Bay Area landlords look to leverage sustainable stamp of approval to improve their business.

By Sasha Vasilyuk Clockwise: 101 California Street, San Francisco Sunnyvale Business Park, Sunnyvale 45 Fremont, San Francisco Opposite: Stoneridge Corporate Plaza, Pleasanton

“… [E]ventually, I think LEED will just become the standard operating procedure, and it will have a muted effect from a marketing perspective.”

Greg Fogg, managing director for tenant representation at Jones Lang LaSalle

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p h o t o s by C h a d Z i emendorf

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n an attempt to market commercial properties in the tough economy, Bay Area owners are going green.

While there have been fewer applications for certification for new buildings under the Leadership in Energy and Environmental Design program this year, 88 projects have applied for LEED Existing Building certification so far this year. According to CB Richard Ellis, the brokerage behind the research, that is higher than the total in all of last year, which was 78.

Marketing-potential and occupancy cost-savings are the two main reasons property owners are looking to go green. With the number of Bay Area buildings that have actually achieved LEED certification still relatively small, the strategy may be finding success.

That said, the cost to improve building systems to make buildings LEEDcompatible remains an issue. Lenders today want property owners to prove they will earn a payback for LEED-related improvements in as little as a yearand-a-half before they agree to extend a loan. In the past, lenders would accept payback periods of as long as five years, says Paul Tiña, managing director and associate principal at Sunnyvale engineering firm Glumac.

LEED certification is overseen by the U.S. Green Building Council. Existing-Building LEED certification fees range from $1,250 for buildings less than 50,000 square feet to $12,000 for buildings larger than 500,000 square feet. The charges are higher for non-USGBC members and include only the application fees, not the cost of hiring consultants or the improvements themselves.

“LEED buildings tend to be attractive because it shows a certain level of progressive thinking on the part of the owner,” said Greg Fogg, managing director for tenant representation at Jones Lang LaSalle. “It does give a competitive advantage. But eventually, I think LEED will just become the standard operating procedure, and it will have a muted effect from a marketing perspective.”

This year’s applicants include some major projects such as the Embarcadero Center, 101 California Street and 45 Fremont Street in San Francisco; Sunnyvale Business Park in Sunnyvale; and 6120-6160 Stoneridge Mall Road in Pleasanton. Four of the submitted projects—45 Fremont, 50 California, 1 California and 235 Montgomery—are owned by real estate investment company Shorenstein.

“We’re committed to greening our portfolio because if you aren’t practicing green principles, you can’t consider yourself a leader in this industry,” said Stan Roualdes, vice president of property management and construction at Shorenstein.

Tenants are often drawn to LEED buildings because they believe in green practices, says Tiña. In fact, tenants who choose LEED buildings tend to work in the sustainability field themselves, said JLL’s Fogg.

“We are finding more and more that the push for LEED is being driven from the top down by chief executive officers,” Tiña said.

Still, cost remains an issue, even for a company like Glumac that embraces environmentally sound operations. In its current search for a new office in the South Bay, Tiña said, the company wants to find a green space but is also concerned by how much it will have to pay.

“Everyone is price-sensitive, especially in this economy,” he said. “Ideally it would be nice not to pay more for rent.”

While many projects seek to become LEED-certified, thus far, only a select few have crossed the finish line. Nationally, there are nearly 25,500 projects that have registered to become LEED certified, but only 3,316, or 13 percent, have achieved the goal, according to the Green Building Council. Registered projects are those that are somewhere in the LEED-certification pipeline but not yet through it.

In San Francisco, there are 63 LEED-certified projects measuring nearly eight million square feet, a small fraction of the city’s total 196 million square

feet of commercial development, according to the city.

Other Bay Area counties, with hundreds of millions of square feet of commercial space, account for the 91 additional projects certified since the inception of the program in 1998, according to the Green Building Council.

The latest of these is Ellis Partners’ 111 Sutter St., which became the first historic building in San Francisco to achieve Silver LEED certification this summer. The 83-year-old property, which has housed NBC radio, San Francisco Mayor Joseph Alioto and the fictional Sam Spade of “The Maltese Falcon,” is listed on the National Register of Historic Places.

For Ellis, getting Silver LEED certification turned out to be the icing on an already baked cake. The company had been evaluating the property’s energy use and the related systems and put in several million dollars worth of upgrades. Getting LEED certified was an important way to validate that.

“We realized that particularly in today’s environment the bottom line for tenants and landlords is very important, and the reduction in costs is what everyone is looking at,” said Kathy Wells, the senior vice president and asset manager for Ellis who oversaw the certification process. “We’ve been in the process of analyzing our energy systems for a while.”

But not everyone is jumping on the LEED bandwagon. As cities like Palo Alto create their own green building ordinances, some companies are choosing to get certified by their city and skip LEED altogether, said Primo Orpilla of design firm Studio O+A. Studio O+A designed the interior improvements for Facebook’s new headquarters in Palo Alto, an older office and research and development building once occupied by scientific measurement equipment maker Agilent Technologies Inc. But the young social-networking company chose not to seek LEED certification from the U.S. Green Building Council, Orpilla says, because Facebook expects to stay in the building for only five years.

Yet Orpilla also sees a larger issue at work: “Because some cities are going to have their own green ordinance that you’re going to have to go through, the question is why you would go through the LEED certification, too?”

Orpilla said.

San Francisco’s green building ordinance, which went into effect in November 2008, requires applicants to get certified under LEED or hire a consultant to verify LEED equivalency.

“We don’t think many people will go for this alternate route,” said Richard Chien of San Francisco’s Department of the Environment. “It would probably cost at least as much if not more to find a consultant to review these things, and you wouldn’t be able to call yourself a LEED-rated building.”

“You might as well go that other route, so you could get a plaque and market your building,” Chien said. n

Search for LEED-ership A flush of Bay Area properties has registered this year to become certified under the Leadership in Energy and Environmental Design program for existing buildings.

Here is a partial list: The Plaza at Walnut Creek, Walnut Creek (office) The Signature Center, Bldgs. 4900, 5000, Pleasanton (office) University Circle, East Palo Alto (offices) Bldgs. 910, 920, 960, 970, Franklin Templeton Investments, San Mateo (corporate campus, office) Bridgepointe Office Park, San Mateo (office) 1100, 1200 Park Place, San Mateo (office 1900 Alameda, San Mateo (office) 700 Concar, San Mateo (office) 199 Fremont Street, San Francisco (office) Central Park Plaza, San Jose (office, Daycare, restaurant) Century Plaza II, San Jose (office) 201 Mission, San Francisco (office) Callaj Building, Berkeley (office) 275 Battery Street, San Francisco (office) 2999 Oak Road, Walnut Creek (office) 343 Sansome, San Francisco (office) 44 Montgomery, San Francisco (office) 555 Mission Street, San Francisco (office) 601 California Avenue, Palo Alto (office) 650 Page Mill Road, Palo Alto (office) 4555, 4557 and 4655 Great America Parkway, Santa Clara (office, recreation, restaurant) 1300 Clay, Oakland (office) 499, 501 and 505 14th Street, Oakland (office) 150 California Street, San Francisco (office) 150 Mathilda Place, Sunnyvale (office) 190 Mathilda Place, Sunnyvale (office) 150 Spear, San Francisco (office) 1680 Mission, San Francisco (office) Bayshore Technology Park, Redwood City (office, restaurant) Bldgs. 1,2 Bernal Corporate Park, Pleasanton (office) 6425, 6455, 6475 Bay Center Offices, Emeryville (offices, health care, laboratory) Source: U.S. Green Building Council

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Freshly Minted Renovation of San Francisco’s Old Mint includes a plan to make it the country’s first LEED Platinum historic landmark.

By Sasha Vasilyuk

As a prime destination in a city that prides itself on its green reputation, the Old Mint is slated to become the first historic landmark in the country to achieve Platinum LEED, the highest level of certification offered by the U.S. Green Building Council.

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ew have visited the dark silent dungeons of the Old Mint on 5th and Mission streets in San Francisco, where heavy doors hide the empty brick rooms that once housed the building’s shiny coins.

But by 2013, the building is slated to become the front door of the city, where tourists will get information from the relocated Convention and Visitors Bureau and locals will learn more about San Francisco’s history in the new city museum.

As a prime destination in a city that prides itself on its green reputation, the Old Mint also is slated to become the first historic landmark in the country to achieve Platinum LEED, the highest level of certification offered by the U.S. Green Building Council. According to the San Francisco Museum and Historical Society, which is heading the renovation project, “The Mint will foster stewardship and environmental participation through aspirations of LEED Platinum certification, carbon neutrality, visitor education and community inspiration.”

Earlier this year, the Historical Society hired HOK as the architect and Arup as the engineers to convert the 1874 building into a showcase of innovation. The society’s executive director, Erik Christoffersen, says the vision for the new Mint includes a visitor’s

center, a museum with preserved vaults and interactive classrooms, a covered courtyard for events, a roof-top garden and a café plaza featuring local retailers.

The plans are ambitious and costly. Proponents need $95 million to complete the job, only a third of which has been raised so far.

The project managers at the Historical Society and HOK weren’t ready to discuss details of their sustainability effort just yet.

The quest to gain the ultimate environmental blessing for the Mint highlights an interesting irony: Old buildings were often constructed with far more thought about their local setting and climate than more modern construction, making the structures inherently more sustainable. In the case of the Mint, the building’s original architecture includes six-foot-thick granite walls, which keep the building cool, and tall windows, which admit a lot of natural light.

“Historic buildings before World War II and before the advent of air-conditioning were designed very carefully with an eye toward natural heating and cooling, day lighting and the comfort of people inside without airconditioning,” said Stephen Farneth, a principal at San Francisco’s Architectural Resources Group, which specializes in historic buildings and sustainable design. “Their proportions and almost everything about them fits into the sustainability profile, so with just a bit of improvement these buildings can be upgraded in ways that make them very green and still preserve the building.”

ARG has just been retained by the federal government to help restore San Francisco’s historic 50 United Nations building at Civic Center Plaza and attain Gold LEED certification. Buildings constructed after the arrival of air-conditioning have proven to be much less energy efficient, according to Farneth, because they often have poorly insulated walls and lots of glass.

“Architects were interested in making special design statements that often didn’t pay much attention to natural climate and relied completely on air-conditioning,” he said.

“There are often tremendous challenges in terms of preservation because they go against the grain of sustainable building ideas.”

Not all historic buildings lend themselves to easier LEED certification, Farneth added.

“LEED doesn’t always recognize all the great values inherent in historic buildings.”

Despite the challenges, ARG believes “any historic building can be rehabilitated sustainably and meet the necessary guidelines,” he said. n

p h o t o by C h a d Z i emendorf

green

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theregistrysf.com 29

redevelopment

Piering into the Future Fall should start the search for developers to undertake the huge remake of Pier 70.

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hanging economic realities and shifting interests in San Francisco’s waterfront are transforming how San Francisco’s post-recession recovery will materialize. Recently announced projects vying for a place along the waterfront include the Exploratorium at Piers 15-17, a revived cruise-ship terminal at Piers 27-31 and the new town proposal for port lands at Mission Bay. Unlike these projects, Pier 70, along the central waterfront, has been the subject of a decade-long effort to retain one of the city’s most important continuously operational maritime industrial sites west of the Mississippi. The port’s recently published Pier 70 Preferred Master Plan focuses on the 65-acre site as the linchpin that binds the city’s southern reaches to the growing Mission Bay medical and biotech industries.

Pier 70’s redevelopment stands out as the most ambitious, challenging and expensive effort in the port’s history. At the same time, it promises exponential reward not only in our quality of life but also in the broadening of our economic base. A daunting $660 million estimated cost should realize three quarters of a million square feet of rehabilitated historic buildings, three million square feet of new development, twenty acres of open space, waterfront access, required infrastructure and environmental remediation. Now, much of this property lies unused and unproductive. Instead, it could be a thriving commercial center.

The port, with its Central Waterfront Citizens Advisory Committee and consultants Roma Design Group, Economic & Planning Systems Inc. and Carey & Co. Inc., has formulated the master plan, which retains industrial maritime operations, saving and infusing new life into nationally important historic buildings and compatible new development. As the report notes, “Pier 70 represents one of the most significant historic industrial complexes in the United States.” After public workshops in August and staff refinements to the plan, the search for a developer should start as early as this fall.

The industrial history of the area known as Point San Quentin dates to the 1850s when the area was a spit of land projecting into deep water. As the urban shoreline was pushed into the bay shallows to make room for streets to connect the central and southern waterfronts, maritime industries emerged and grew at Pier 70. Ideally located outside the most populated areas of the city but near the rail yards in the Mission Bay district, the pier was the site of gunpowder manufacturing and steel and rope production.

In the last quarter of the 19th century, light industry was replaced by large-scale ship manufacture. The Union Iron Works built the first West Coast steel shipyard and launched one of the first steel-hulled ships constructed in the United States. After Bethlehem Steel arrived, the site became the center of the nation’s shipbuilding industry with the construction of military ships from the Spanish American War through the end of World War II. Today, BAE Systems’ dry-dock operations provide ship repair to a growing number of commercial ocean vessels, including the cruise-ship industry, within the confines of development largely created in the late 18th and19th centuries. With much-needed improvements to facilities and transit corridors, the master plan establishes land-use policies to maintain competitive ship repair as an integral part of Pier 70’s future.

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To be sure, lots of work remains to be done, much of it thorny and difficult. But progress continues. The plan’s proposed half-mile extension of public access to the bay’s shoreline at Pier 70 and retention of ship-repair operations have garnered the support of the San Francisco Bay Conservation and Development Commission, the state’s permitting agency for construction along San Francisco Bay. Their approval is key to any public or private development of bay lands. Further refinements to other implementing documents such as the Bay Area Seaport Plan will require a joint effort with the Metropolitan Transportation Commission.

While there remains a financing gap of some $50 million due to the needed upfront investment in retaining important historic buildings, the port continues to explore ways to provide additional offset revenue. Eligibility for National Register of Historic Places’ federal-tax incentives could bring $70 million to rehabilitate the most important buildings. With passage of Prop D by San Francisco voters in November 2008, infrastructure bonds opened a new funding stream estimated at $40 million for development along San Francisco’s waterfront, all of which will be directed to this project. Combined with Historic Tax Credits ($70 million), Park Bond proceeds ($10 million), Land-Secured Bond proceeds ($80 million) and Infrastructure Financing District proceeds ($110 million), public financing for the project comprises a significant portion of the $800 million in projected revenue over the next 30 years. Legislation introduced by state assemblyman Tom Ammiano in February, AB1176, would allow the port-like redevelopment agencies to capture impact fees from improvements. Funds would be specifically allocated to shoreline restoration, removal of bay fill and waterfront public access.

Philanthropic investment for the early preservation of the site’s historic resources is another means to assure the project’s success. A significant institutional or not-for-profit anchor suited to the project’s historic resources is being sought to infuse Pier 70 with the interest and energy to attract and capture other users.

The plan’s development strategy clearly states that “a strong public/private partnership is essential to realizing the vision for Pier 70.” Development partners with private-sector knowledge and leadership in furthering the adaptive re-use process are the key to successful revitalization. Only experienced private-sector partners are able bring the expert knowledge of market conditions, private financing and an intimate knowledge of the entitlement process that are necessary to get this job done.

The Pier 70 challenge represents one of the many obstacles facing the San Francisco Port Commission, Executive Director Monique Moyer and her staff. As they seek to overcome the $1.9 billion price tag for needed improvements to San Francisco’s waterfront infrastructure and to satisfy government, not-for-profit, institutional and private-sector interests, we hope that this remarkably underutilized resource will be one of the first to gain support and momentum for redevelopment. n Charles Edwin Chase can be reached at 415.421.1680 or C.Chase@ARGSF.com.

i mage c o urtesy o f t h e por t of s a n fr a nc i sco

By Charles Edwin Chase, AIA

Powering Your Success in Commercial Real Estate

Where’s the Uptick?

By Rob La Eace

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rob

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Area A: Pacific Heights, Cow Hollow, Marina, Presidio Heights, Nob Hill, Russian Hill Area B: Sunset District Area C: SOMA, South Beach, Mission Bay

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s we turn the corner and step from summer into fall, a great uncertainty looms in the air. Has the market stabilized? Will there be a secondary dip taking us to even greater lows before our ultimate recovery? Nobody has the crystal ball to answer those questions, although September and October will be very telling. With large amounts of inventory entering the market, we could see an increase in the average number of days a home stays on the market. I just don’t see additional buyers materializing simply because there is more inventory, however. Thus, an increase in supply with no increase in demand can’t be a good combination. To try to grasp where we stand, I ran data from the SFARMLS comparing August 2008 to August 2009. August 2008, being just prior to the global collapse, provides a good 2008 sample month. As we have struggled back over the past year to what would now be considered a better state of bad, August 2008 vs. August 2009 can be viewed as a good apples-to-apples comparison.

As I have done in the past, I took three sample regions of the city that represent different price points, neighborhood lifestyles and property styles. I compared these areas in three categories: median sale price, number of properties for sale and number of properties sold. I have to say, some of the results surprised me a bit.

B. single family $0-$700K Median price Homes for sale Homes sold

2008 $640,000 15 3

2009 % Change $545,000 -14.84% 16 6.67% 5 66.67%

$700K-$1MM Median price Homes for sale Homes sold

2008 $804,000 30 14

2009 % Change $763,000 -5.10% 28 -6.67% 14 0.00%

$1MM-$3MM Median price Homes for sale Homes sold

2008 $1,160,000 18 5

2009 % Change $1,225,000 5.60% 9 -50.00% 2 -60.00%

C. condos $0-$700K Median price Homes for sale Homes sold

2008 $585,000 126 28

2009 % Change $540,000 -7.69% 183 45.24% 22 -21.43%

2009 % Change $825,000 -10.81% 59 25.53% 15 36.36%

$700K-$1MM Median price Homes for sale Homes sold

2008 $793,000 84 15

2009 % Change $793,000 0.00% 61 -27.38% 6 -60.00%

2009 % Change $1,260,000 -16.00% 77 40.00% 12 9.09%

$1MM-$3MM Median price Homes for sale Homes sold

2008 $1,197,000 63 6

2009 % Change $1,275,000 6.52% 63 0.00% 5 -16.67%

A. Single family $1MM-$3MM 2008 Median price $2,330,000 Homes for sale 17 Homes sold 4

2009 % Change $2,299,000 -1.33% 26 52.94% 8 100.00%

$3MM-$7MM Median Price Homes for sale Homes sold

2008 $4,200,000 13 9

2009 % Change $4,300,000 2.38% 24 84.62% 2 -77.78%

A. condos $0-$700K Median price Homes for sale Homes sold

2008 $575,000 36 13

2009 % Change $575,000 0.00% 79 119.44% 8 -38.46%

$700K-$1MM Median price Homes for sale Homes sold

2008 $925,000 47 11

$1MM-$3MM Median price Homes for sale Homes sold

2008 $1,500,000 55 11

In reviewing the data, the lack of activity in the higher-end Pacific Heights range stands out boldly. When one appreciates that there were nearly double the number of homes listed in the $3 million to $7 million range this August vs. last, and yet the number that sold was down by 78 percent, that’s huge. In fact, if I could think of a word bigger than huge, I would use it. Also notable in Area A was the drop off in sales of the entry level condos. The homes priced at $700K and below had a 38 percent drop in volume. This is clearly a sign that the new lending guidelines and higher down payment requirements are hindering some first time buyers from taking advantage of the best buying climate in years—particularly when you once again realize that the inventory for sale during this time was up 119 percent!

Just as the entry level condos in Area A were affected, so too have the entry level single family homes in Area B suffered one of the most significant median price reductions. Although, as you see this reduction in price lead to a 67 percent increase in sales. In fact, this is the take home message from the graph.

In all areas you will find that with two exceptions anywhere you saw a median price decrease, you saw a sales volume increase. Of the two exceptions, the $700K and under range of condos in Area C stands out.

Though the median price dropped close to 8 percent, the sales volume dropped even further, by 21 percent, and there were 45 percent MORE units for sale as well. Ouch. The resale market in Area C has faced stiff competition from developers anxious to unload heavy inventory from slow selling projects. With price reductions, and offers of credits towards everything from flooring and window coverings to HOA dues, many buyers have found more value in buying new.

Traditionally, we see an uptick in activity in October. It will behoove us all to watch this year’s numbers very closely. It’s yet to be seen whether our pumpkins will have frowns or smiles on them this Halloween. Until then, keep fighting the good fight. n Rob La Eace can be reached at 415-290-7228 or rob@roblaeace.com.

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Real S C E N E O F

T H E

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Left: Speaker M.J. Ryan

East bay crew East Bay Commercial Real Estate Women (CREW) featured best-selling author M.J. Ryan who provided valuable and timely advice on “Surviving Change You Didn’t Ask For” at its July luncheon.

The buzzing multi-specialty industry group meets and networks monthly on the 3rd Thursday of every month at Scott’s Seafood Restaurant in Walnut Creek. Information about upcoming topics and special events can be found at eastbaycrew.org.

Right (l-r): Current President Kristina Lawson, Miller Starr Regalia; Cheryl Hayes, GE Real Estate

Above left (l-r): Doreen Del Testa, Mechanics Bank; Mandi Begley, Varsity Painting; Dana Tsubota, Miller Starr Regalia Above right: Current President Kristina Lawson

Above right (l-r): Dana Tsubota, Miller Starr Regalia; Allison Tabor, TEAC Structural Engineering; M.J. Ryan, speaker Right (l-r): Teresa Goodwin, Director of Community Affairs; Sandra Weck, Colliers International

P h o t o s by L i nd a G i ff i n

Right (l-r): Rachel Leaverton, Commercial Services Group; Andrea Bell, Allsteel; Jane Fordham, AAI Design Solutions for the Workplace

09 Calendar

january february march april may june july august september october november december

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West Coast Green will host its conference at Fort Mason Center, San Francisco. Visit westcoastgreen.com for more information.

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CREW Silicon Valley will host its Annual Developer’s Panel at Hotel Valencia, 368 Santana Row, Ste. 1020, San Jose. Visit crewsv.org for more information.

SPUR will host a lunchtime forum featuring the topic “A New Doyle Drive” at 12:30 p.m. at 654 Mission St., San Francisco. Members $0 and nonmembers $5. Visit spur.org for more information.

CREW San Francisco will host a program featuring the topic “Private and Public Partnerships” at 11:30 a.m. at City Club, San Francisco. Visit crewsf.org for more information.

CREW East Bay will host an event featuring the topic “Energizing Your Brand with New Media Strategies” from 5:30 p.m. to 7:30 p.m. at Miller Starr Regalia, 1331 N. California Blvd., 5th floor, Walnut Creek. Please RSVP to teresa@peoplespacedg.com. Visit eastbaycrew.org for more information.

BOMA Young Professionals will host a Career Success Workshop from 11:45 a.m. to 1 p.m. at 650 California Lower Level Conference Room.

This is a free event for members only. Visit bomasf.org for more information.

BOMA Silicon Valley will host its monthly luncheon titled “Taking the Lead Again in 2010” from 11:30 a.m. to 1:30 p.m. at San Jose Holiday Inn (Mediterranean Room), 1740 North First Street, San Jose. Members $50 and non-members $75.

Visit bomasv.org for more information.

ULI San Francisco will host Learn from the Best VIII from 5:30 p.m. to 7:30 p.m. at 555 Mission St., 33rd floor, San Francisco. Visit ulisf.org for more information.

2-6

BOMA San Francisco will host a Foundations of Real Estate Management course from 9 a.m. to 4 p.m. at 650 California St., Level B1, Conference Center, San Francisco. Members $600 and nonmembers $750. There are 5 modules in this series.

Visit bomasf.org for more information.

3

Leap will host its 26th Annual Sandcastle Contest from 10 a.m. to 4:00 p.m. at Ocean Beach, San Francisco. Visit leap4kids.org for more information.

USGBC Northern California Chapter will host a LEED AP BD&C Exam Prep workshop from 8 a.m. to 4 p.m. at AIA-SF/USGBC-NCC, 130 Sutter St., Ste. 600, San Francisco. Members $295 and nonmembers $345. For more information, contact info@usgbc-ncc.org.

15

CoreNet Northern California Chapter will host a chapter meeting from 3:30 p.m. to 7 p.m. Visit corenet-norcal.org for more information.

15

BOMA San Francisco will host its annual membership meeting and member recognition luncheon from 11:30 a.m. to 1:30 p.m. at The City Club, Main Dining Room, 155 Sansome St., 11th floor, San Francisco. Members $55 and non-members $70.

Visit bomasf.org for more information.

BOMA Silicon Valley will host its Membership Mixer from 5:30 p.m. to 8:30 p.m. at Kyoto Palace Japanese Steakhouse, 1875 S Bascome Ave., #2500, Campbell. $15 per person; free if you bring a prospective member. Register by 9/29 at boma-sv.org.

16

8

ULI San Francisco will host a new member welcome orientation from 4 p.m. to 5 p.m. at Hyatt Regency Hotel, San Francisco. Visit ulisf.org for more information.

SPUR will host a lunchtime forum featuring the topic “Problems of a 21st Century City” at 12:30 p.m. at 654 Mission St., San Francisco. Members $0 and non-members $5. Visit spur.org for more information.

8

19

ULI San Francisco will host the 2009 Fall Meeting Kick-off Reception from 5:30 p.m. to 7:30 p.m. at Hyatt Regency, 5 Embarcadero Center, San Francisco. Cocktails and appetizers will be served. This event is free for all ULI SF members. Visit ulisf.org for more information.

8

BOMA Oakland/East Bay will host a luncheon in Oakland. Visit bomaoeb.org for more info.

CREW East Bay will host its 4th Birthday Bash from 5:30 p.m. to 7:30 p.m. at Campo di Bocce, Livermore. Visit eastbaycrew.org for more information.

13

SPUR will host a lunchtime forum featuring the topic “Designing TOD’s” at 12:30 p.m. at 654 Mission St., San Francisco. Members $0 and non-members $5. Visit spur.org for more info.

34 theregistrysf.com

o ct o ber 2 0 0 9

BOMA Oakland/East Bay will host the 2nd Annual Walter Finch Golf Classic from 9:30 a.m. to 5:30 p.m. at The Course at Wente Vineyards, 5050 Arroyo Rd., Livermore. Fees for golf and dinner tickets are $250 per person/$1,000 a foursome and dinner-only tickets are $60 per person. Visit bomaoeb.org for more information.

20-22

Global Strategic Management Institute will host a green conference featuring the topic “The Sustainable Building Series: Retrofits at The Mission Bay Conference Center at UCSF, San Francisco. Visit sustainablebuildingseries.com for

20

SPUR’s Young Urbanists will host a Ballots and Brews event at 6 p.m. at 654 Mission St., San Francisco. Members $0 and non-members $10.

Visit spur.org for more information or RSVP to events@spur.org.

21

SPUR will host a walking tour of SF Great Streets demonstration projects at 12:30 p.m. at 654 Mission St., San Francisco. This is for members only.

Visit spur.org for more information or register at tours@spur.org.

22

CREW Silicon Valley will host Oktoberfest at Teske’s Germania, 255 N First Street & Devine, San Jose. Visit crewsv.org for more details.

22

CREW San Francisco will host a Sponsor “Thank You” luncheon at City Club, San Francisco. Visit crewsf.org for more information.

26

USGBC Northern California Chapter will host a LEED AP ID&C Exam Prep workshop from 8 a.m. to 4 p.m. at PG&E Pacific Energy Center, 851 Howard St., San Francisco. Members $295 and nonmembers $345. For more information, contact info@usgbc-ncc.org.

28

1st Annual Commercial Interiors Contractors Awards (CICA) will be held at the Mezanine, San Francisco. Visit cica-sf.com for ticket information.

28

SPUR will host a lunchtime forum featuring the topic “Save the Planet! (or plan B)” at 12:30 p.m. at 654 Mission St., San Francisco. Members $0 and non-members $5. Visit spur.org for more info.

USGBC Northern California Chapter will host a LEED AP O&M Exam Prep workshop from 8 a.m. to 4 p.m. at AIA-SF/USGBC-NCC, 130 Sutter St., Ste. 600, San Francisco. Members $295 and nonmembers $345. For more information, contact info@usgbc-ncc.org.

IFMA Silicon Valley will host “Shake, Rattle and Roll” from 5 p.m. to 8 p.m. at Holiday Inn/ Mediterranean Center, 1740 N. First St., San Jose.

Members $0 and non-members $40. Contact Joy Dunn at 408.226.0190 or admin@ifmasv.org with questions.

29

CREW San Francisco will host a brown bag series called “Strategic Business Planning for the New Year” from 11:45 a.m. to 1 p.m. at Schiff Hardin, LLP, One Market St., Spear Tower, 32nd floor, San Francisco. Visit crewsf.org for more info.

30

USGBC Northern California Chapter will host a Green Building Super Heroes Awards Gala from 7 p.m. to 10:30 p.m. at California Academy of Sciences, Concourse Drive, 55 Music Concourse Drive, Golden Gate Park, San Francisco.

Members $115 and non-members $150. Visit usgbc-ncc.org for more information.

East Bay was the most resilient market during this period, while the South Bay and North Bay suffered the most, according to Rofo.com, the online location for small businesses seeking to lease new space. In line with the overall trend, Oakland saw an increase in searches, while San Jose and San Tomorrow’s Titans Today Francisco decreased. The North Bay continues its trend of having strongly trailed the rest of the Bay Area in small business demand.

The biggest gainers had a city from each region, but in markets that are on the lower end of the rent scale. The biggest losers were in markets that tend to have higher rents.

This indicates, along with the increased searching in the East Bay, that tenants are actively seeking space in areas with lower rental rates, reflecting the continued economic downturn and effort by most businesses to cut back on costs.

Weekly Web Site Visits Per Region 4000

4000

4000

3500

3500

3500

3000

3000

3000

2500

2500

2500

2000

2000

2000

1500

1500

1500

1000

1000

1000

500

500

0

JUL JUL AUG AUG AUG AUG AUG SEP 19 26 2 9 16 23 30 6

0

500 JUL JUL AUG AUG AUG AUG AUG SEP 19 26 2 9 16 23 30 6

4000

4000

3500

3500

3000

3000

2500

2500

2000

2000

1500

1500

1000

1000

500 0

0

JUL JUL AUG AUG AUG AUG AUG SEP 19 26 2 9 16 23 30 6

PEOPLE on the move

continued from page 9

NAI BT Commercial Adds Managing Partner and Vice President Mike Copeland and Justin Grilli have joined NAI BT Commercial in Pleasanton, the firm’s newest office location. Copeland joins NAI BT as managing partner and Grilli joins as vice president.

Over 25 years, Copeland has specialized in the sale and lease of commercial office space in Santa Clara, Alameda and Contra Costa counties. He moves to NAI BT after more than 12 years at Colliers International, where he was vice president of the firm’s office/R&D division for more than 10 years. Since 1985, he has completed more than 900 sale and lease transactions totaling more than 8.5 million square feet. He has handled land and commercial property sales and leasing with total consideration of more than $650 million.

Grilli has represented commercial real estate clients for more than five years, specializing in the sale and lease of office space in the Tri-Valley and Bay Area, with an emphasis in representing developers, investors and tenants in the acquisition, disposition and leasing of their projects. Since 2003, Grilli has participated in more than 250 lease and sale transactions totaling more than two million square feet and more than $60 million in value.

Pacific Property Co. Adds AIG Veteran Marci Byrne has joined West Coast multifamily investor Pacific Property Co. as regional director of asset management. Byrne will be responsible for Pacific’s Northern California and Seattle portfolio. She brings to Pacific 22 years of industry experience handling acquisitions, lending, asset management and foreclosures of multi-family assets. She has held significant lending, asset management and investment roles with American International Group Inc. and holds a certified public accountant designation. n

500 JUL JUL AUG AUG AUG AUG AUG SEP 19 26 2 9 16 23 30 6

0

JUL JUL AUG AUG AUG AUG AUG SEP 19 26 2 9 16 23 30 6

All search data is for space under 5,000 square feet. Data includes office, retail and industrial searches. North Bay: Marin, Sonoma, Napa and Solano counties; East Bay: Alameda and Contra Costa counties; San Francisco: San Francisco County; Peninsula: San Mateo County, including Palo Alto and Los Altos; South Bay: Santa Clara County.

Join Now for 2010 and Receive the Remaining Months of 2009 FREE!*

Get 15 for 12!

PUT BOMA SILICON VALLEY TO WORK FOR YOU RIGHT NOW! *Join BOMA today to take advantage of the many opportunities, benefits, and local association activities available to members. Anyone joining BOMA after October 1 receives the rest of the year FREE when paying their 2010 dues.

THE BOMA PROMISE We can help you excel as a commercial real estate professional by: • Connectivity – Connecting you to commercial real estate issues, trends and news • Leadership – Making you a better leader • Networking – Providing you with a network of colleagues and friends • Advocacy – Protecting and advancing your industry, profession, and career

THE BOMA VALUE

BOMA membership returns your investment to you EQUATION and your company far in excess of annual dues paid.

• Advocacy = Profitability • Networking = Business Opportunities • Education = Informed Decision-Making • Membership = Money Saved

Learn more by contacting BOMA Silicon Valley. Don’t Hesitate! Contact us TODAY! BOMA Silicon Valley, 63 Metro Drive, San Jose, CA 95110; Tel: 408-453-7222; Email: bob@boma-sv.org

Numbers

by the

Shadowy Figures quantify what otherwise would be a big unknown for landlords and tenants about how long rents will languish. “The market doesn’t move until you eat through this space,” he says. But, “if we get the same recovery we had last go round, we should expect the vacancy rate to go down faster and rents to rise faster.”

Layoffs are never good news for landlords because companies losing workers don’t need more of what the landlord has on offer. But job losses won’t always translate into immediate vacancy. Some tenant companies hang on to extra space, never offering it for sublease or broadcasting its existence. Among brokers, this internal vacancy is called shadow space because it is not reflected in official vacancy rates and its size is difficult to measure. Yet every broker and landlord knows that until shadow vacancy is absorbed, measured vacancy won’t fall and rents won’t rise.

Grubb calculated its findings by totaling jobs lost in the previous year in each marketplace then estimating how many square feet those workers would have filled based on a multiple of 250 square feet for each employee. They then compared that to the amount of square footage that companies had given back to the market and accounted for any new construction that would have increased vacancy but not reflected a worker layoff.

A new study by brokerage Grubb & Ellis seeks to quantify how much shadow office space the Bay Area’s largest markets have and how that compares to the build up after the 2001 dot-com crash. According to Grubb, at the end of the second quarter, San Francisco had 11 million square feet of shadow space.

San Jose had 8.6 million square feet and the East Bay had 13 million. After the dot-com implosion, San Francisco had 18.4 million square feet of shadow office space. San Jose had an eye-popping 26.1 million square feet, and the East Bay had a relatively tame 5.83 million square feet.

Even at the peak of the recent real estate boom, none of the three markets shed all of its shadow space, though San Francisco came closest.

Meanwhile, Geisreiter says he hears anecdotally that tenants are responding to current market conditions. Brokers who represent tenant interests are requesting longer-term leases and advising clients to jump at today’s low rental rates.

“Tenant brokers are telling their clients, ‘Lock in. It’s not going to get much better than this,’” he says. n

Mark Geisreiter, regional managing director for Grubb, says the findings help

100%

100

How Shadow Space is Calculated (Silicon Valley Illustration)* 80

The Great ReCession Jobs lost since Jun 40 '08 Square feet per employee Projected available20space

41,700 x 250 10,425,000

0

Q2 '02 Q2 '05 Space added from Q4 ‘08 to Q2 ‘09** 3,739,267 New construction - 1,948,471 SAN FRANCISCO Space returned to market 1,790,796 100

60% The dotcom bust

vs.

60

80%

Jobs lost Jun40% '01 to Jun '02 110,000 Square feet per employee x 250 20% Projected available space 27,500,000 Q2 '09 Space

Q2 '07

0%

added from Q4 '01 to Q2 Q2'02'02** Q2 '05 1,416,639 Q2 '07 New construction 13,989 Space returned to market 1,402,650

60

10,425,000 - 80% 1,790,796 8,634,204

Projected available space 27,500,000 Space returned 80% to market - 1,402,650 Shadow space 26,097,350

40

Rentable square 60 feet

62,576,256

Total rentableSAN square feet FRANCISCO

50,114,948

20

Percent shadow40space

13.80%

Percent shadow space

52.07%

0

60%

60%

40%

40% 20%

20%

*Note: Office space only; does not include R&D space 20 **Includes new construction and previously leased space 0% Q2 '07 Q2 '09 Q2 '02 Q2 '05

Q2 '02

Q2 '05

0

SAN FRANCISCO

SAN FRANCISCO

Q2 '02

Q2 '09

100%

100%

Projected available space Space returned to 100 market Shadow80space

80

SA

Q2 '05 EAST BAYQ2 '07

Source: Grubb & Ellis Q2 '07 Q2 '09

Q2 '09

0%

Q2 '02

Q2 '05

Q2 '07

Q2 '09

SILICON VALLEY

EAST BAY

100%

100%

100%

100

80%

80%

80% 76.04%

80

60%

60%

60%

60

40%

40

20%

20

0%

0

Q2 '02

51.04%

100

32.56% 80 21.18%

Q2 '02

Q2 '05

18.25%

Q2 '05 Q2 '07

Q2 '07 Q2 '09

EAST BAY

100%San Francisco 80% 100 80 60

Shadow space Estimated vacancy

60%Available space

0%

40Q2 '09

0%

Q2 '02

Q2 '05

38.91% 18.45%

Q2 '07

0 Q2 '07

51.04% 20.18% 18.25% 32.56%

28.94%

1.68%

60%Available space 40%

o ct o ber 2 0 0 9

EAST BAY

25.18%

26.85%

Q2 '09

0%

Q2 '05

Q2 '07

Q2 '02

Estimated vacancy Q2 '02 Q2 '09Q2 '05 10.39% 0.12%

Q2 '05

43.51% 40% 20%

20

Q2 East Q2'09 '02 100%Q2 '05 Bay Q2 '07 6.35%SILICON 17.36%VALLEY Shadow space 80% 22.10% 18.50% 11.90% 15.20% Estimated vacancy Q2 '02

40% 36 theregistrysf.com 20%

60

40%SAN FRANCISCO 21.79% 12.92% 20%

20% 0%

EAST BAY

Q2 '07

Q2 '09

Shadow Space

Q2 '02

Q2 '05

Q2 '07

Shadow space

52.00%

9.20%

8.10% 13.50%

11.40% 12.80% 12.70% 16.50%

Estimated vacancy

24.04% 15.98% 18.75% 30.01%

21.79% 12.92% 18.45% 38.91%

Available space SILICON VALLEY

76.04% 25.18% 26.85% 43.51%

5.75% 22.41%

Silicon Valley

Q2 '09

Q2 '09

Program Sponsors

Coming Events Fall 2009 Developer’s Panel

Brave New World “How today’s capital environment has changed the landscape for the developer and investment market” Join us to hear from these industry leaders how things have changed and how they plan to move forward in the future:

CREW National Convention Sept. 30-Oct. 3, 2009 Hynes Convention Center Boston, MA

Oktoberfest Thursday, Oct. 22 Teske’s Germania 255 N. First Street & Devin

Moderator

Kirsten Grado, Senior Vice President, CB Richard Ellis

San Jose, CA Registration 5:30 p.m.

Panelists Steve Dunn, Managing Partner, Legacy Partners Sam Hooker, Director of Acquisitions, Embarcadero Capital Partners David Downdney, Western Region Manager, Asset Management, GE Real Estate

November Monthly Luncheon November 3, 2009 Silicon Valley Capital Club Registration 11:30 a.m.

Wednesday, October 14, 2009 The Hotel Valencia 368 Santana Row, Suite 1020, San Jose, CA 95128

11:30 a.m. - Networking/Registration 12:00 p.m. - Lunch/Program

CREW SV Members - $55; Non-members - $65 Paid reservations due by: Friday, October 9, 2009 • Registrations accepted onlyline only. Please register at www.crewsv.org • Credit cards are the only form of payment accepted for pre-registration • Walk-ins are not automatically accommodated For further registration information contact: Chris Blair 785/832-1808 x205 or Claudia Folzman 408/282-1080.

Holiday Celebration Silent Charity Auction December 1, 2009 Silicon Valley Capital Club Registration 4:30p.m.

activity

Reports commercial leases

Address

City

Lease Sq. Ft.

Tenant/Rep/Brokerage

Landlord/Rep/Brokerage

Notes

Alameda County 41470-41486 Boyce Rd

Fremont

62,216

Menlo Logistics

AMB/Joe Kelly (CB Richard Ellis)

Warehouse, Renewal

33508-33580 Central Ave

Union City

55,842

Real Mex Restaurants/Craig Hagglund (Lee & Assoc)

Bob Ferraro (CB Richard Ellis)

Warehouse, Renewal

161 S Vasco Rd

Livermore

40,294 Xantrex Technology Inc

DCT Industrial/Mike Carrigg & Michael Lloyd, SIOR (Colliers International Pleasanton)

Renewal, 36M

Mission Blvd & Rousseau

Hayward

37,800

Cinos Corp/Prospect Properties

FPA Hayward Associates/ Meghann Martindale (Terranomics) Retail

40675 Encyclopedia Cir

Fremont

35,913

Arista Corp

Yurio Yokota, Anges Masuda & Jane Kumabe/Michael Spiro & Steve Kapp, SIOR (Cornish & Carey Commercial)

Industrial

2756 Alvarado St

San Leandro

23,500

Quality Green Building Supplies, Inc./Adan Martinez (NAI BT Commercial Oakland)

Noel Yi/Brian Collins (NAI BT Commercial Oakland)

Warehouse, 36M

910 Page Ave

Fremont

23,490

Ampro Systems/Michael Filice & Tom Bartasi (CB Richard Ellis)

Page Ventures/Thomas Taylor (CB Richard Ellis)

R&D, Renewal

46400-46410 Fremont Blvd

Fremont

19,528

GreenVolts/Scott Stone (Aegis Realty)

Equity Office/Joe Kelly (CB Richard Ellis)

R&D, Direct

541 66th Ave

Oakland

16,000

USA Metal/Mike Barry (CB Richard Ellis)

I.C.R. Systems/Mike Barry (CB Richard Ellis)

Warehouse, Renewal

48430-48438 Milmont Dr

Fremont

11,080

Atlas Copco Compressors/Joe Kelly (CB Richard Ellis)

AMB/Joe Kelly (CB Richard Ellis)

Manufacturing, Direct

2464 Blackhawk Plaza Cir

Danville

26,518

New Evolution Fitness Company/Jim Peterson & Nancy Vohs Cimino (Cornish & Carey Commercial)

Blackhawk Centercal LLC

Retail

5875 Lone Tree Way

Antioch

12,268

Spirit Halloween Super Stores/René Brochier (Colliers International Pleasanton)

Thomasville Retail/René Brochier (Colliers International Pleasanton)

Direct Deal, 3M

San Francisco

19,995

Conrad Imports/Scott Mason (NAI BT Commercial Burlingame)

Bay West Development

Office, Renewal, 54M

1003-1105 Hamilton Ct

Menlo Park

33,397

Inside Source Inc/Ben Paul (NAI BT Commercial Burlingame)

AMB Property Corporation/Randy Arrillaga (NAI BT Commercial Palo Alto)

Office, 26M

3508 Haven Ave

Redwood City

28,196

Southwest Offset Printing Co.

Sammut Investments/John Weatherby & Josh Amoroso (Corish & Carey Commercial)

Warehouse

570-586 Eccles Ave

S San Francisco

22,452

Kamino Intl/Matt Squires (NAI BT Commercial Burlingame)

Data Safe

Warehouse, 48M

150,180, & 190 Industrial Wy

Brisbane

21,250

Sunset Garage, Inc/Richard Beale (Beale Properties)

Universal Paragon Corporation/Marshall Hydorn (NAI BT Commercial Burlingame)

Warehouse, Renewal, 60M

Contra Costa County

San Francisco County 600 Townsend St-West Bldg.

San Mateo County

Santa Clara County 3500 Deer Creek Rd

Palo Alto

350,000 Tesla (Cornish & Carey Commercial)

Stanford/Doug Beck, Jim Fletcher (CB Richard Ellis)

R&D, Direct

2121 Laurelwood Rd

Santa Clara

60,000 Bay Furniture & Mattress/Ben Knight (CB Richard Ellis)

SPI 2121 Laurelwood/Rob Shannon (CBRE)

Warehouse, Direct

50 Rio Robles Dr

San Jose

41,772

BlueArc Corp/John Brackett (NAI BT Commercial San Jose) Equity Office Properties

R&D

1277-1283 Reamwood Ave

Sunnyvale

32,862

Citala US/Direct Deal

Rreef/Scott Prosser (CB Richard Ellis)

R&D, Renewal

3069 Lawrence Expwy

Sunnyvale

32,324

Sue Tong

Lawrence Expressway Square/Pat Conkin (Cornish & Carey Commercial)

R&D

361-391 Brokaw Rd, E

San Jose

24,151

Deliverex

AMB Property Corporation/ Jim Kovaleski (NAI BT Commercial San Jose)

Warehouse, 69M

2290 Ringwood Ave

San Jose

21,781

Plasma Ruggedized Solutions/Vince Scott (CB Richard Ellis)

The Realty Associates Fund/Scott Prosser & Nick Whitstone (CB Richard Ellis)

Manufacturing, Renewal

1154-1156 Sonora Ct

Sunnyvale

19,705

Scintera Networks/Mike Courson (NAI BT Commercial Palo Alto)

D.R. Stephens & Co./Kalil Jenab (NAI BT Commercial Palo Alto)

R&D, Renewal, 36M

285 Hamilton Ave

Palo Alto

19,562

Ning/David Hiebert

Thoits Bros Inc/Jack Troedson (Cornish & Carey Commercial) Office, 29M

1371-1391 McCarthy Blvd

Milpitas

19,188

Array Networks, Inc/Kevin Sweatt (NAI BT Commercial San Jose)

RREEF Alternative Investments

R&D, Renewal, 72M

310-340 S Milpitas Blvd

Milpitas

11,800

Zuca/Todd Husak (CB Richard Ellis)

Scott Goldberg/Todd Husak (CB Richard Ellis)

R&D, Direct

2170-2190 Paragon Dr

San Jose

11,550

Airgard/Thomas Taylor & Chris Shephers (CB Richard Ellis)

RREEF Alternative Investments/Colin Feichtmeir (CPS Corfac International)

R&D, Direct

2460 N First St

San Jose

10,640

F5 Networks/Mike Charters & Chris Shepherd (CB Richard Ellis)

Agnilux & Jovian Data/Thomas Taylor & Vince Machado (CB Richard Ellis)

Office, Sublease

240 Third St

Los Altos

10,317

Tan Group/Steve Henry & Randy Gabrielson (Cornish & Carey Commercial)

240 Third Los Altos LLC/Steve Henry & Randy Gabrielson (Cornish & Carey Commercial)

Office

1151 Sonora Ct

Sunnyvale

10,000

Skillnet Solutions, Inc.

Silicon Valley CA-I LLC/Rod Scherba, Jack Troedson, Phil Mahoney (Cornish & Carey Commercial)

R&D

240 Third St

Los Altos

10,317

Tan Group/Steve Henry & Randy Gabrielson (Cornish & Carey Commercial)

240 Third Los Altos LLC/Steve Henry & Randy Gabrielson (Cornish & Carey Commercial)

Office

38 theregistrysf.com

o ct o ber 2 0 0 9

commercial sales City

Property Size

Buyer

Seller

Hayward

66,612 sf

Wallace Lee

3111 Fostoria Wy

San Ramon

30,185 sf

333 Civic Dr

Pleasant Hill

3445 San Pablo Dam Rd

Price

Product Type

Brokers

Neil Fisher, LRF Properties

$5,500,500

Industrial

Sam Higgins & Jay Hagglund (NAI BT Commercial)

Elena Sartor

David Grieve ACV OD

$6,906,000

Retail

Elizabeth Akers (First Street)

10,555 sf

Edward Lampe, Johnston, Gremaux & Rossi CPAs

David Sanson, Trecon Properties LLC

$2,960,000

Office

Eric Erickson, Sonny O'Drobinak, Trigger Reital, Josh Scott & Jeffrey Weil (Colliers International)

El Sobrante

36 units

Larry Wolfson

Noe Solis

$3,195,000

Multi-Family

N/A

401 Taraval St

San Francisco

13,666 sf

Henry Chan Tam

Woodcock Living Trust

$2,950,000

Office

Michael Miller (Coldwell Banker)

140 Bluxome St

San Francisco

9,600 sf

Richard Kanner

Real Estate Trsut at Silicon

$2,750,000

Industrial

David Phu (TRI Commercial)

2050 Powell St

San Francisco

14 units

Trophy Properties

Marc Melso

$3,010,000

Multi-Family

Stephen Pugh (Alain Pinel Investment Group)

925 Pierce St

San Francisco

13 units

Trophy Properties

Thomas Iveli

$2,025,000

Multi-Family

Stephen Pugh (Alain Pinel Investment Group)

466 14th St

San Francisco

12 units

Trophy Properties

Yat-Pang Au

3,600,000

Multi-Family

Stephen Pugh (Alain Pinel Investment Group)

Address Alameda County 27279 Industrial Blvd Contra Costa County

San Francisco County

San Mateo County 91 Westborough Blvd

S San Francisco 12,484 sf

Fred Lui

Elie Mehrdad

$3,200,000 (Reported by Loopnet)

Office

N/A

412 Richmond Dr

Millbrae

15 units

Emma Begovich

Vito Cavallini

$3,550,000

Multi-Family

N/A

1348 Burlingame Ave

Burlingame

N/A

Chanmoon Park

Naghi Hatami-Ford

$5,900,000

Retail

N/A

5935 Rossi Ln

Gilroy

53,277 sf

RFS Properties

Gregory Graves

$2,500,000

Industrial

N/A

1531 Atterberry Ln

San Jose

43,345 sf

Kimberly O'Sullivan

Mark Roos

$3,503,500

Industrial

N/A

1560 Saratoga Sunnyvale Rd

Sunnyvale

5,621 sf

Vijay Kumar Bajaj

Kenneth Vrning

$2,458,500

Office

N/A

373 River Oaks Cir

San Jose

226 units

Morton Friedkin of FRG Fountains LLC

Avalon Communities Inc.

$42,250,000 (Reported by Loopnet)

Multi-Family

N/A

690 Victor Wy

Mountain View

12 units

Ken Wang

Richard Henry

$2,760,000 (Reported by CoStar)

Multi-Family

Bryan Danforth & Brian Henry (NAI BT Commercial)

Santa Clara County

For-Sale Transaction Data provided by:

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FinalOffeR Re-Building

bill Groth

By Sharon Simonson

Commercial development and improvement volumes have plummeted in the last year as shriveling tenant demand has dragged down rents and punished property values. But Bill Groth, a principal at general contractor BCCI Construction Co., says the worst is behind the sector regionally. The 150-person firm is headquartered in San Francisco and has offices in Palo Alto. It is a fullservice general contractor that does building renovation, historic restoration, commercial interiors and green building. It most recently completed the historic restoration of Pier 40 for the San Francisco Redevelopment Agency. The job’s specifications included the ability to execute underwater. It also demanded such skills as tracking tides and ocean currents as well as the spawning schedule of local herring. In 2008, BCCI reported revenue of $165 million. The company projects a 30 percent dropoff in that figure this year but expects some recovery in 2010. In the remaining months of this year, the company continues to work on large-scale tenant improvements for SalesForce.com and the headquarters for a multi-national, Fortune-500 financial consulting firm in downtown San Francisco.

You anticipate rising demand for construction next year. What’s behind your optimism?

BG Our preconstruction group is very busy right now. Clients are trying to decide how to take advantage of the market and whether to build or get a reduction in their rent. People are feeling for the bottom. We have been helping a lot of companies evaluate the cost of moving to a new location. It also seems a lot more people are busy right now in leasing, design and engineering. People also feel good when the stock market is going up, which increases spending and the demand for more products.

We are tracking 390 estimates that we have worked on through the year to date. Last year at this same time we were tracking 232. The value of the estimates in 2008 was $159 million. So far this year, they are worth $353 million. Part of the increase is change in the type of projects we’re doing. We are competing for more ground-up construction, including work in the academic and public sectors, which sometimes have bigger projects and projects such as libraries, which have a higher cost because they are specialpurpose buildings What kind of work is keeping BCCI busy today?

BG We are seeing a number of buildings in the city where owners are building LEED-spec suites. These are spaces that are being built without a tenant to LEED-certified and in some cases, LEED-Silver standards. It isn’t just green materials; it is changing lighting-control systems and water fixtures, faucets and toilets to reduce water use. The idea is to attract companies that are interested in a healthy environment.

The spaces are between 7,000 square-feet and 10,000 square-feet. We are wrapping up two suites at One Montgomery Tower, which is owned by UBS and Prudential [Insurance Co. of America]. They are very interested in making their buildings sustainable. We also are doing some at 101 California [Street] and another in preconstruction that is not completely locked down right now, also in downtown San Francisco. Speculative suites aren’t new, but building them to LEED standards is. There has been some press about tenants and owners not wanting to build to LEED because of the costs.

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We are not seeing that. We currently have 21 projects that are in different phases of LEED certification, including our own San Francisco headquarters remodel, which is pending LEED Silver. Some are tenant improvements, some are core-and-shell construction, some are new construction and some are existing buildings.

Rising construction costs driven by increases in material costs such as steel and cement caused consternation during the expansion stage of this real-estate cycle. How are prices holding up now?

BG As a percentage of total project costs, material costs have not come down that much.

From what I’m seeing, they’ve fallen 3 [percent] to 4 percent. Some materials have had bigger price decreases than that, but others haven’t decreased at all. Sheet metal, studs and gypsum have all gone down, but carpet actually went up. Carpet is petroleum-based and is shipped a lot of the time from the East Coast. With the increases in [gas and oil] prices, that has driven its cost up. Acoustical tiles have gone up slightly.

The biggest reduction is in subcontractor gross margins. In the third and fourth quarters of 2008, subs were getting 15 percent and 20 percent markups on their work. Now they are only getting 5 percent and 10 percent. Their work has really fallen off this year. For us, there is activity in estimating and leasing, but their work has thinned out quite a bit, so a lot more people are competing for a lot less work, so there are folks who are taking work at cost just to keep the cash flowing. That is not sustainable.

One of the things not going down and that will continue to rise are labor costs, especially union labor. A lot of the trades get regularly scheduled increases. The plumbers, painters, carpet layers and sprinkler contractors all got increases in July in the $1 an hour to $2 an hour range. The electrical unions have no change until May 2010.

All of that is in long-term contracts and not all of it is for take-home pay. Some of it is for pensions and health care.

Any sectors where you are seeing more demand?

BG We see an uptick in activity in the South Bay among information-technology companies and companies that support tech companies.

We’re talking the Ciscos, Intuits and SalesForce. com. There are some law firms that are looking at leasing space and potentially moving. We have not seen a lot of start-up firms, and we look for everything, every possible lead in the market place, and follow up on them. Most of it is bigger firms. Our Palo Alto office has a dedicated team that works for Stanford [University]. We started doing work for Stanford about two years ago and have competed for a number of projects.

We did a student-housing project, Blackwelder & Quillen, and a renovation of Stanford University’s School of Education’s Cubberley Hall.

You’ve worked in construction, beginning as a carpenter doing estimating, for nearly 30 years. What’s the same about this downturn compared to others and what is different?

BG This market is a little different but there are similarities. When you look at the number of contractors bidding in the market place today, some of the larger ones are competing for projects in the $2 million to $6 million range.

Two to three years ago, some of them would not have been looking at anything less than $10 million. That’s another reason I think we’ve hit bottom. I’m seeing contractors that I have not competed with since 2001. It’s everyone at the watering hole and the size of the water hole keeps shrinking. When it’s huge everyone fits and gets along, but when it shrinks, it gets to be a frenzy. On some of these public projects we look at, we are one of 18 contractors. Even in the private sector right now, we recently bid a project right in downtown San Francisco, and there were seven general contractors looking at it, and that is quite a few. To be competing with five or six general contractors right now is pretty common, but it wasn’t two or three years ago.

Will that trend continue? I think it is probably peaking right now. But it’s a buyers’ market and companies are in the marketplace right now testing the waters to see how low can they get their construction costs. n

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